Virgin Money Group Annual Report and Accounts
2017 There’s Money and There’s Virgin Money
About us With our powerful brand, strong balance sheet and customer-focused culture, we delivered a strong performance for all of our stakeholders in 2017. Strategic Report Financial Results Governance Risk Management Report Financial Statements Other Information 01
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Cover image: Virgin Money Lounge, Manchester Lounge, Manchester Virgin Money image: Cover Virgin Money Group Annual Report Annual 2017 Group Money Virgin
On behalf of the Board the Board of On behalf Glen Moreno Chair 2018 26 February Five year track record record track year Five highlights 2017 Company Financial highlights Business performance Chair's statement review Executive’s Chief in Finance Charter Women overview Market business model and strategy Our stakeholders for Delivering overview Risk Financial Results results Group Summary of Business line results Governance the Chair from Letter Directors of Board Executive Money Virgin Report Governance Corporate Report Remuneration Directors’ Report Directors’ Management Report Risk management risk to approach The Group’s management framework Risk risks Emerging classes Risk classes risk analysis of Full Financial Statements report Independent auditors' financial statements Consolidated financial statements company Parent information Other Measures Performance Alternative Glossary Abbreviations information Shareholder Report and the consolidated the Strategic The 2017 Annual Report and Accounts incorporates Directors. of the Board by been approved which have both of Financial Statements,
Strategic Report Strategic What’sin this report? 02 I Virgin Money Group Annual Report 2017
Five year track record
2017 2016 2015 2014 2013 2017 Growth highlights Mortgage balances £bn 33.7 29.7 25.5 21.9 19.6
Credit card balances £bn 3.0 2.4 1.6 1.1 0.8 Total customer loan Total assets £bn 41.1 35.1 30.2 26.5 24.6 balances grew by Deposit balances £bn 30.8 28.1 25.1 22.4 21.1 +14% Quality
Cost of risk % 0.13 0.13 0.12 0.07 0.15 Low cost of risk Common Equity Tier 1 capital ratio % 13.8 15.2 17.5 19.0 15.5
Total capital ratio % 18.1 20.4 20.2 22.1 18.6 0.13%
Leverage ratio % 3.9 4.4 4.0 4.1 3.8
Returns Return on tangible Statutory total income £m 662.7 581.4 521.9 438.3 383.0 equity Statutory profit before tax £m 262.6 194.4 138.0 34.0 185.4 14.0% Underlying profit before tax £m 273.3 213.3 160.7 104.7 43.6
Net interest margin % 1.57 1.60 1.65 1.50 1.26 Statutory basic Cost:income ratio % 52.3 57.2 63.5 72.5 80.1 earnings per share Return on tangible equity % 14.0 12.4 10.9 7.4 2.6 +29% Statutory basic earnings p 37.8 29.4 22.9 (0.4) 42.4 per share Underlying basic earnings p 39.8 32.7 26.8 18.5 5.6 per share
Alternative performance measures Non-financial reporting These results have been prepared in accordance with The Group has complied with the new EU non-financial International Financial Reporting Standards (IFRS). Aspects reporting directive requirements within the strategic report. of the results are adjusted for IPO share based payments, The non-financial information provided by the Group strategic items and fair value (losses)/gains on financial can be found at: instruments, to reflect underlying performance. Further > Description of business model – page 18 information, including reconciliations of the Group’s statutory and underlying results, is reported on page 48 and in note 2 to > Principal risks – page 36 the consolidated financial statements. > Environmental – page 28 The Group uses a number of alternative performance > Employees – pages 14 and 22 measures, including underlying profit, in the analysis and > Social matters – page 26 discussion of its business performance and financial position. Further information is provided on page 262. > Human Rights and Modern Slavery statement – page 25 > Anti-bribery statement – page 25 Strategic Report Financial Results Governance Risk Management Report Financial Statements Other Information 03
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9% share per value in tangible net asset Growth of Growth
Virgin Money Group Annual Report Annual 2017 Group Money Virgin
Increased our Increased NPS to intermediary +61 won also +55 in 2016. We from Partnership’ for ‘Best Lender the for & General Legal from and ‘Best year consecutive third Sesame from Lender’ Innovative Bankhall Group Increased our overall customer customer overall our Increased (NPS) to Score Net Promoter +40 +29 in 2016, maintaining from the position as one of our banks in the retail best-rated advocacy customer UK for Corporate Partners Partners Corporate Customers Customers Growth of Growth 28% tax before in underlying profit
Recommended final dividend of 4.1 pence per ordinary share. This will result in a total dividend for total dividend result in a This will share. ordinary 4.1 pence per final dividend of Recommended 2016 to 17.6% compared of an increase share, 6.0 pence per 2017 of
for good causes. good causes. for online not-for-profit Our donation service has raised than £600 million for more charities since launching in 2009 £95 million Virgin Money Giving Money Virgin almost raise helped to Communities colleagues work for for colleagues work and our Money Virgin engagement score latest well 76% compares of standards against industry Colleagues than More 3,000 Final dividend in statutory profit after tax after profit in statutory Growth of Growth 37% Company and shareholders and shareholders Company
In 2017 we delivered a delivered strong we performance for all our of stakeholders. In 2017 Highlights included: 2017 Company highlights 2017 04 I Virgin Money Group Annual Report 2017
Financial highlights
Total customer loan balances Deposit balances 14% 10% growth growth
2017 £36.7bn 2017 £30.8bn
2016 £32.1bn 2016 £28.1bn
2015 £27.1bn 2015 £25.1bn
Positive JAWS Cost:income ratio 9.8% 52.3% 13.5% growth in underlying total income for 2017 against 3.7% growth in expenses 2017 52.3% 2017 Income £666.0m 2016 57.2% 2017 Expenses £348.5m 2015 63.5% 2016 Income £586.9m
2016 Expenses £336.0m
2015 Income £523.5m
2015 Expenses £332.5m
Underlying profit Statutory profit before tax after tax 28% 37% growth growth
2017 £273.3m 2017 £192.1m
2016 £213.3m 2016 £140.1m
2015 £160.7m 2015 £111.2m Strategic Report Financial Results Governance Risk Management Report Financial Statements Other Information 05
I £2.97
14.0% £2.73 37.8 pence 12.4% £2.54 10.9% 29.4 pence 22.9 pence Virgin Money Group Annual Report Annual 2017 Group Money Virgin
2015 2017 2016 2017 2016 2015 2015 2017 2016 29% growth Tangible net asset value per share share per value net asset Tangible 9% growth basic earnings Statutory share per Return on tangible equity on tangible Return 14.0% for 2017 for
1.65% 17.5% 1.60% 1.57% 39.8 pence 15.2% 13.8% 32.7 pence 26.8 pence
2016 2015 2017 2017 2015 2016 2015 2016 2017
22% growth Underlying basic earnings share per for 2017 for CET1 Ratio 13.8%
for 2017 for NIM 1.57% 06 I Virgin Money Group Annual Report 2017
Business performance
Mortgages Savings
We offer customers a range of residential We offer customers a range of competitively- and buy-to-let mortgages in the prime priced instant access and fixed term savings secured lending market. Mortgages are products, both also available as ISAs. sold predominantly through our intermediary Savings are sold primarily through our digital partners and supplemented by direct channels and supplemented by our Stores distribution. and contact centres.
Mortgage balances increased to Deposit balances increased to £33.7 billion £30.8 billion Growth of 13% was driven by our Growth of 10% was underpinned by our award-winning intermediary proposition. award-winning ISA proposition.
Lending to first time buyers Cash ISA balances increased to increased £16.6 billion 20% year-on-year. New build completions Growth of 27% year-on-year reflected the increased by almost 50% year-on-year. strong appeal of our ISA products.
Mortgage retention supported Strong retention of savings balance growth customers 72% of mortgage customers selected 89% of fixed rate savings a new mortgage product with us at the end customers stayed with us at the end of their existing deal, up from 68% in 2016. of their product term.
Mortgage completion spread Total cost of funds reduced to 168 bps from 187 bps in 2016. 59 bps from 80 bps in 2016.
33.7 30.8 28.1 29.7 25.1 25.5
2015 2016 2017 2015 2016 2017
Mortgage balances (£bn) Deposit balances (£bn) Strategic Report Financial Results Governance Risk Management Report Financial Statements Other Information
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3.7 2017
3.4 2016 policies. Our new life insurance insurance new life policies. Our
the increased benefitting from
Funds under management (£bn) Virgin Money Group Annual Report Annual 2017 Group Money Virgin from +35 in 2016 demonstrating +35 in 2016 demonstrating from 3.0 2015 Financial services investment, customers offer We services. and currency insurance with specialist partners work We propositions, these deliver to digital channels. through primarily proposition performed well in its first year well in its first performed proposition since launch. £20,000 ISA savings allowance and strong and strong allowance £20,000 ISA savings Atlantic Airways. Virgin partnership through sales to the customer improvements the benefit of channel. direct in our journey Growth of 10% including the performance 10% including the performance of Growth Index. All-Share the FTSE of ISA sales & shares Stocks +40% NPS insurance Travel +38 insurance Life +4,000 Funds under management under Funds £3.7 billion
3.0 2017
2.4 2016 Credit card balances (£bn) compared to 1.70% in 2016. 1.70% to compared
share of the £71 billion cards market. market. the £71 billion cards of share retail spend per active account active spend per retail
1.6 2015 supported by increased customer customer increased supported by Back’, Money engagement and ‘Virgin initiative. new cashback our Cost of risk Cost of 1.51% Retail spend per active account active spend per Retail +8% 4.1% Market share share Market £3.0 billion while consistently achieved 24% was of Growth segments. customer low risk targeting Credit card balances increased to to balances increased card Credit Credit cards cards Credit customers quality prime credit offer We and retail balance transfer of a range primarily sold are Cards cards. credit digital channels. our through performance. continued low arrears reflecting 08 I Virgin Money Group Annual Report 2017
Chair’s statement
Overview and Strategy 2017 was a year of continued strong progress for Virgin Money. The overall performance of the business demonstrated delivery against all three elements of our strategy of growth, quality and returns. We generated market- beating growth across our core products, maintained a high- quality balance sheet and continued to improve operating leverage, resulting in increased profitability. As a result of this strong financial performance, the Board has recommended a final dividend of 4.1 pence per ordinary share. This will result in a total dividend for the year of 6.0 pence per share, an increase of 17.6 per cent compared to 2016. The UK banking sector continues to face a number of near-term challenges. The future performance of the UK Glen Moreno Chair economy is uncertain. The volume and pace of regulatory change remains high and competitive pressures in our I am pleased to report that Virgin product markets increased during the year. Money once again delivered profitable Against the backdrop of regulatory change and heightened competition, the Board took time to review and refresh our growth despite a year of economic strategy to underpin profitable growth in the long term. uncertainty and increased competition As a result of the significant technological and regulatory change impacting UK retail banking, the focus of our in the UK banking sector. refreshed strategy is on broadening our retail customer proposition and launching a range of products and services for the Small and Medium Enterprises (SME) banking market in the UK. A particular benefit of this strategy is that it will allow us to diversify our funding sources so that we remain competitively funded in an environment of lower asset pricing. We plan to target new sources of funding in the SME deposit market and through our new digital bank, which aims to increase our reach into current accounts and additional savings markets. Broadening our customer proposition in this way represents a significant strategic step in support of the long-term success of the business and our ability to deliver sustainable value to shareholders. Our purpose and corporate culture Our corporate ambition is to make ‘everyone better off’ (EBO). This means delivering good value to our customers, treating colleagues well, making a positive contribution to society, building positive relationships with our corporate partners and delivering sustainable profits to our shareholders. Our culture is based on this ambition and sustains a virtuous circle which raises awareness of the Virgin Money brand and business as a force for good in the communities in which we work. We believe that our culture is unique in the UK banking sector. It provides the foundation for our strategy and differentiated approach to banking. Strategic Report Financial Results Governance Risk Management Report Financial Statements Other Information
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Virgin Money Group Annual Report Annual 2017 Group Money Virgin
Glen Moreno Moreno Glen Chair February26 2018 Chair succession succession Chair After three years as Chair,I confirmed my intention to retire andin to 2018 return home to the USA. Irene Dorner will join the Board as Chair Elect on 1 March 2018, becoming Chair on 1 April 2018, following my retirement. Irene brings a wealth of retail banking experience at an important time for the Group. Outlook enterWe with 2018 customer advocacy at its highest ever performing strongly a business. and level Regulatory change pressures competitive and challenges both bring and will refreshed strategy address our have to opportunities. We these issues and to enable the business to continue to grow profitably in the long term. I am pleased that the strength of our core business allows us to fund capital investment and from internalinnovation capital resources. have madeWe significant progress in my three years as Chair and I would like to reiterate my thanks to the Board, the management team and all colleagues across the business for everything they have done to make Virgin Money succeed.
Directors Directors areWe committed to ensuring that the Board has the right balance of skills and experience to meet the challenges and opportunities ahead. As a resultwe review the Board’s changes announced of were number A regularly. composition during the year as part of the Board’s succession planning to ensure that the Board is well placed for the next phase of the development. Group’s Darren Pope succeeded Norman McLuskie as Chair of the Audit Committee, with Norman assuming the Chair of the Remuneration Committee, succeeding Marilyn Spearing. Additionally, Geeta Gopalan has become Chair of the Risk Committee, succeeding chairs Keogh, Colin now who Virgin Money Unit Managers Trust Limited. I would like to thank Non-Executive Director Gordon McCallum, who retired from the Board in October 2017, for his significant contribution to the development of Virgin Money over the past 20 years. Amy Stirling was nominated by the Virgin Group to replace Gordon and joined the Board in December 2017. The remuneration structure at Virgin Money is designed to link reward with the delivery of our strategy of growth, quality and returns. believe We in fair rewards for colleagues whose and performance delivering long-term to is aligned sustainable returns shareholders. for During the year the business continued to grow strongly producing increased statutory profits, strong capital generation and an increased dividend. As a result, the annual bonus outcome for Executive Directors was set atthe upper end of the range of potential outcomes. More information on how we ensure our approach to remuneration supports the business strategy can be found in our remuneration report on page 95. Remuneration Remuneration We areWe dedicated to supporting the communities in which we work to help them flourish, both socially and economically. Over 13,900 charities have now registered with Virgin Money Giving, our not-for-profit online donation platform, and more than £600 million has been donated to charities through the service since its launch in 2009, including £95 million in 2017. The Virgin Money Foundation, which tackles social and economic disadvantage, awarded grants of nearly £3 million can You read more aboutin how 2017. we benefit our stakeholders on page 20. 10 I Virgin Money Group Annual Report 2017
Chief Executive’s review
Overview We have delivered strong financial performance in 2017 as we continued to deliver on our customer focused strategy of growth, quality and returns. As a result of continuing operational leverage and our focus on maintaining excellent asset quality we met or exceeded all of our financial targets for the year. Underlying profit before tax increased to £273.3 million and return on tangible equity improved to 14.0 per cent. On an underlying basis, total income increased by 13.5 per cent while cost growth was limited to 3.7 per cent. As a result, our cost:income ratio improved to 52.3 per cent, from 57.2 per cent in 2016, and we exited 2017 with a ratio of 49.4 per cent in the fourth quarter. Jayne-Anne Gadhia CBE Chief Executive Statutory profit after tax increased by 37.1 per cent to £192.1 million, generating 182 basis points of Common Equity Tier 1 (CET1) capital after distributions to Additional Tier 1 We have delivered strong financial capital holders. This strong capital generation supported performance in 2017 and made the ongoing growth of our lending portfolios together with ongoing investment in both our core business and the build of considerable progress against our our digital bank. strategic objectives. We met or As a consequence, our Common Equity Tier 1 ratio was 13.8 exceeded all of our financial targets for per cent at the end of 2017, while our total capital ratio was the year and we are confident about the 18.1 per cent and our leverage ratio was 3.9 per cent. The cost of risk remained at 13 basis points, demonstrating continued long term prospects for the company. high asset quality as well as a benign economic environment. As a result of our performance in 2017 the Board has The strength of the business, our recommended a final dividend of 4.1 pence per ordinary customer focused strategy, and our share, bringing the total dividend per share for the year new strategic initiatives, including SME to 6.0 pence. This represents an increase of 17.6 per cent compared to 2016. and digital, position us well to continue Over the course of the year, we announced new strategic growing profitably while serving and developments which will enable us to continue serving and growing our customer base with good growing our customer base, while meeting the challenges of regulatory change and an increasingly competitive market value, straightforward products and environment in the key markets in which we operate. outstanding customer service. The strength of the business combined with these new strategic initiatives position us well to continue growing profitably and we are confident about the long term prospects for the business. Customers and distribution We provide our customers with good value products, supported by outstanding service with the aim of driving long lasting relationships and deeper product engagement. By ensuring that customers are at the heart of our strategy, the proportion of new product sales to existing customers increased to 12.2 per cent, compared to 10.7 per cent in 2016. We also further improved customer advocacy across all areas of the business, with our overall Net Promoter Score (NPS) increasing to +40, up from +29 at 2016. Strategic Report Financial Results Governance Risk Management Report Financial Statements Other Information
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Virgin Money Group Annual Report Annual 2017 Group Money Virgin Regulatory developments From 1 January UK banks 2019 will be required to establish ring-fenced operations separating retail wholesale from activities. All of Virgin Money’s activities will be within the ring-fence and we are on track to meet the relevant requirements. As the high street banks may seek to deploy excess ring-fenced deposits into the market, this could lead to heightened competition. remain We well-placed to continue competing mortgage for share despite market this backdrop. competitive The second Payment Services Directive (PSD2), which took effect 13 fromJanuary 2018, together with Open Banking allows customers to choose to share data from their banking competition increase This parties. will third with products in money transmission by allowing new entrants, including new financial technology companies, to compete with the established clearing banks. Although the impact is likely to be felt most strongly and immediately in the personal current account (PCA) market, in which we are not currently a material participant, in the long-term we believe Open Banking and PSD2 represent an opportunity for us to attract customers from the high street banks. In our credit card business our focus has always been on returns sustainable delivering and strong risk-adjusted through a first-rate card proposition for customers in the prime segment of the market. now We have 1.2 million customers and I am pleased to report that we reached our target of £3.0 billion high-quality credit card balances by the As a resultend of our of 2017. stringent underwriting criteria we recruited 98 per cent of new balance transfer customers segment. customer quality highest the from Customer engagement increased as we improved our online service for mobile usage and Virgin Money Back, our customer cashback platform, supported an 8 per cent increase in average retail account. active per spend funds investment transparent and straightforward Our supportcontinue to funds growing under management of £3.7 billion. New money inflows increased 27 by per cent year-on-year and, supported by the increased ISA savings allowance to £20,000, transfers of ISA balances into stocks shares ISAsand year. the during strong were Our new life insurance proposition performed well in its first year since launch with sales, policies in force and income all exceeding previous life insurance partnerships. The contribution from travel insurance and currency services was flat year-on-year as we focused on higher margin travel insurance business at lower volumes.
Business performanceBusiness offerWe good value, straightforward and transparent supports model distribution multi-channel our and products cost effective growth in our deposit business.We continue to offer our savings customers both good value and sustainable savings rates in the context of the market. Our approach delivered further improvements to our average cost of retail increased supportedfunds and levels. retention strong We deposit balances by 9.6 per cent year-on-year, while reducing our cost of funds to basis 59 points from 80 basis points in In2016. a competitive overall market for retail deposits, we were delighted that customers continue to recognise the value of our proposition with 89 per cent retention of fixed maturities.rate mortgage businessOur performance quality and high remains continues to benefit from strong retention of maturing intermediarybalances award-winning an and proposition. Improvements intermediary our in a proposition drove further increase in our intermediary NPS from to +61 +55 and supportedin 2016 mortgage balance growth per of 13 cent to During £33.7 billion the year in we 2017. extended our mortgage proposition to help more people onto the housing ladder and launched custom build and shared ownership products. Overall we achieved a market share of gross lending of 3.3 per cent despite lowering volumes towards the end of the year to manage margins and protect returns increasingly an market. competitive in progress Further in our direct channel saw the number of mortgage applications increase per cent by 12 from with 2016 the value of direct mortgages exceeding £1 billion for the first time. Our customers continue to choose our digital channels. Our website remains the most popular channel, with over 28 million website visits, up from 22 million 78 per in 2016. and year delivered sales digitally the during were of cent the use of mobile devices to access products and services increased to per52 cent of all our digital interactions, up from 50 per cent in 2016. Our Lounges complement our Store network and continue to be a standout success. They deliver excellent customer satisfaction with an NPS score of +87 matching best in class peers in the retailsector. As a result, we will be opening a new Lounge in Cardiff in 2018. Our Store network continues to play an important role for customers with a 25 per cent increase year-on-year. opened in-Store accounts new in As a result of improving the Virgin Money Giving (VMG) customer journey we now million have 1.4 registered users of our not-for-profit online donation service. £95 million was donated to charities from 2.2 million individual donations in will We aim to build deeper2017. relationships with our VMG customer base by engaging them beyond charitable donations and exploringways to meet more of their financial needs. 12 I Virgin Money Group Annual Report 2017
Refreshed strategy Outlook At IPO we set out a number of ambitious targets to maintain Our central planning scenario for 2018 assumes a a high quality balance sheet while growing income and driving continuation of relatively benign economic conditions, shareholder returns. We have successfully delivered on those modest economic growth and heightened competition as the initial targets, and we are confident about the next phase in market readjusts to a rising interest rate environment and Virgin Money’s strategy. regulatory changes. The macro and political environment, To ensure that we continue to meet the changing needs of including the impact of the UK leaving the European our customers and navigate the wider changes in the market, Union, remains uncertain which adds a degree of caution we are investing in our digital future and have updated our to our outlook. customer-focused strategy of growth, quality and returns The Bank of England increased interest rates for the first time to provide a strong platform for us to continue to grow in a decade in November 2017 and has indicated that the pace responsibly and profitably in the years ahead. of interest rate increases is expected to be gradual. As part of this strategy, we are developing a data-driven, Our natural long term share of the UK mortgage market customer-centric digital bank which will allow us to take remains at 3 to 3.5 per cent. In 2018 we expect to grow our advantage of the significant technological and regulatory mortgage and cards lending at a single digit percentage rate changes shaping UK retail banking, broaden our customer with banking NIM towards the lower end of a 165 to 170 basis appeal and provide access to a wider pool of UK retail points range. Cost discipline will continue as we invest in our banking revenues. strategic developments and we expect the 2018 cost:income The new strategy will also diversify our funding through both ratio to be no higher than 50 per cent. Small and Medium Enterprises (SMEs) deposits and increased Our lending discipline will support asset quality and, including reach into the current accounts and savings markets. We the impact of IFRS 9, we expect our cost of risk to be no higher launched an SME deposit product in January 2018 and plan to than 20 basis points and to maintain a CET1 ratio around launch a Business Current Account (BCA) by the end of 2018. 13 per cent at the end of 2018. The Virgin Money digital bank will be underpinned by next We expect to maintain a solid double-digit return on tangible generation technology and architecture, offering customers equity in 2018. a Universal Account that can be personalised to create a We will continue to make progress with our SME roll-out and unique proposition tailored to individual needs. In addition to the development of our digital bank over the course of 2018. our current presence in the mortgage, credit card and retail deposit markets, the digital bank will allow us to expand into Over time, these initiatives will significantly increase the the current account and linked primary savings markets. breadth of our proposition, drive new sources of income and reduce operating costs. A broader proposition, lower cost to As such, we will provide an attractive proposition for serve and new sources of funding will drive enhanced returns customers that will enable us to compete against the and support sustainable value creation for shareholders over incumbent banks for lower cost current account balances. the longer term. The operating cost per customer of the digital bank will also be lower than in our core bank, improving our cost- efficiency once operating at scale. Overall, we expect that our strategy will not only result in enhanced returns for shareholders in the longer term, but also enable us to continue delivering innovative products and outstanding service to our customers. Colleagues Jayne-Anne Gadhia CBE Our goal is to nurture a high performing, diverse and Chief Executive committed workforce. We aim to ensure that all colleagues 26 February 2018 can reach their full potential, feel valued and are empowered to thrive in a truly inclusive business. To achieve this we have extended our use of technology to support flexible working and invested in the development of our people managers to make sure they both value and support a diverse workforce. Our latest colleague survey results showed that we achieved a strong staff engagement score of 76 per cent, which compares well against industry standards. Strategic Report Financial Results Governance Risk Management Report Financial Statements Other Information 13
I Lounge Hosts, Virgin Money Lounge, Manchester. Lounge, Manchester. Virgin Money Lounge Hosts, Virgin Money Group Annual Report Annual 2017 Group Money Virgin 14 I Virgin Money Group Annual Report 2017
Women in Finance Charter
senior roles and under-representation of men in customer We are passionate about fairness, service positions. I am pleased to report that we achieved gender balance in equality and inclusion. We are committed hiring and promotions into senior management in 2017. to achieving a 50:50 gender balance Whilst this represents good progress, the team that reports throughout the business by 2020. to the Executive Committee continues to be dominated by men. Men account for 68 per cent of the Executive Committee and their direct reports, and 71 per cent of the wider senior management team. To address this, all members of the Aim Executive Committee have an annual objective to improve As part of the UK government’s drive to improve economic gender balance through recruitment, promotion and productivity, I was asked by HM Treasury to review why development. There is no intention to promote or hire women women make less progress in financial services than in other over men. Our aim is to create a genuinely level playing field industries. The ‘Empowering Productivity: Harnessing the where both men and women succeed on merit. Talents of Women in Financial Services’ report was published Our second area of focus remains gender balance into entry in 2016. We found that there are significant barriers to the level roles. Whilst we increased male representation in 2017, progress of women and breaking down these barriers will only 27 per cent of colleagues in customer service positions improve results both for the financial services sector and are men. We are committed to ensuring our Stores and individual businesses, including Virgin Money. contact centres are equally attractive to men and women as As the Chief Executive, I have taken personal responsibility places to work and develop careers. for addressing these issues at Virgin Money. During 2017 we Action in 2017 continued to make good progress towards achieving our 2020 When researching and writing ‘Empowering Productivity: target of a 50:50 gender-balanced workforce. Harnessing the Talents of Women in Financial Services’, it Meeting the Charter Commitments became clear to me there are a number of key issues across I am responsible and accountable for gender diversity and the industry which must be addressed in order to develop a inclusion at Virgin Money. A gender-balanced workforce is fully inclusive workforce at all levels. They include the need good for business, customers, profitability and workplace to create the right culture, develop supportive line managers culture. To meet our Charter commitments: and have the technology to support a flexible working > we have committed to achieve 50:50 gender balance (within a environment. In 2017, Virgin Money made progress on 10% tolerance) throughout the business by the end of 2020; these key areas: > we publish progress against our 50:50 target annually; and Encouraging the right culture > support to colleagues on maternity leave was enhanced, > we have linked annual performance related pay to including the provision of maternity mentoring to encourage commitments to promote gender diversity for all members of and enable continued career development; the Executive Committee. > during 2017, 56 per cent of new fathers took extended The last commitment reflects the fact that gender balance parental leave at an average of 11 weeks each. Our Shared should be addressed as a business issue and rewarded as such. Parental Leave policy provides colleagues with the equivalent As the CEO, one of my five personal objectives in 2017 was to of maternity pay when their partner returns to work; and lead the business towards fairness, equality and balance in
relation to gender. > we launched a Returners Programme enabling experienced women and men who may have taken a career break, or are Progress in 2017 looking to update their skills and knowledge, to transition into I am pleased to report that gender balance improved at all new roles. The programme runs over a paid three month term levels of the company in 2017: with the possibility of a permanent role on completion. > female representation within senior management grades Investing in supporting people managers increased to 29 per cent, an improvement of 32 per cent; and > we delivered ‘unconscious bias’ training to all our current and > male representation in our entry level roles increased to 27 per aspiring people managers to drive awareness of the issue and cent, an improvement of 8 per cent. to support them in developing strategies to manage it; Whilst progress has been made, these two areas will remain a focus given the under-representation of women in Strategic Report Financial Results Governance Risk Management Report Financial Statements Other Information
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Virgin Money Group Annual Report Annual 2017 Group Money Virgin develop insight and build confidence through our ‘Gender our develop insight and build confidence through Agenda Network’, including events to profile and discuss the relating to fairness and inclusion. issues key enhance the skills of our future business leaders through future business leaders through our enhance the skills of development programmes; and balanced gender profile senior leaders – who have adopted flexible working adopted flexible who have – leaders profile senior take-up; wider arrangements – as role models to encourage pilot a programme to assess a technology solution for contact solution for pilot a programme to assess a technology centre working. home continue to support parents by promoting shared parental parents by continue to support working practices; and friendly and family leave reduce the formalities associated with requesting flexible with requesting reduce the formalities associated working arrangements; take specific action to attract and retain men in entry level men in entry take specific action to attract and retain roles. and customer-facing continue with the formal requirement for gender balance in gender with the formal requirement for continue and panels and candidate shortlists; interview continue to set bonus targets for all Executive Committee continue to set bonus targets for balance; gender members to improve
I believe it is important to be held to account to deliver the Charter commitments, both at Virgin Money and across the financial services industry.We will continue to report on our progress in the years ahead, both within our annual report and on our website, and we will supplement this with disclosures on our gender pay gap. I will continue to champion HM Treasury’s Women in Finance Charter and I encourage all financial services companies to its recommendations, to up targets challenging set sign and progress. on transparently report > > Removing barriersRemoving > > > Flexible culture working > > Jayne-Anne Gadhia CBE Chief Executive February26 2018 > Priorities for 2018 Priorities 2018 for Looking ahead to 2018, we intend to make further progress by continuing to focus on management capability, a flexible identifying and working culture barriers removing and to fairness, equality and inclusion. In particular, we will: capabilityManagement >
Male 2016 66% 73% 48% 79% 25% 78% 57%
Male 2017 64% 69% 47% 74% 27% 71% 56% Headcount % Female 2016 34% 27% 52% 21% 75% 22% 43% Female 2017 36% 31% 53% 26% 73% 29% 44%
Band C Reward Reward Group Exec 1 Band D Exec 2 Band E Band A Band B managers ensuring profiles, anonymous and candidates
decide who to interview on merit alone. Additionally, we use on merit alone. Additionally, interview who to decide which reduce the potential for panels interview mixed gender bias; and gender pay annual tool in our analysis gender we continued to use a and the impact salary process to help managers understand their gap as part of pay on the gender have bonus outcomes decision making process. to make flexible technology we continued to upgrade our migrated all Stores and We have working easier. and home colleagues of our half over with IT platform, new offices to our receiving laptops; via mobile to learning materials colleague access we improved to stay leave technology, and enabled colleagues on parental app; and in touch through a new in app, Charter Women in Finance the we launched practice best to showcase with HM Treasury, conjunction balance. gender actions companies are taking to improve we required all recruitment agencies to provide us with diverse us agencies to provide we required all recruitment of lists
Non Management Executive Level Management Female representation in senior management (Executive and Band A) improved to 29 per up cent December at 31 2017, from 22 per cent as December at 31 2016. As defined by the Hampton Alexander review,31.8 per cent of our Executive Committee and their direct reports were female as December of 31 2017. 2017 gender balance gender balance 2017 we madeIn progress 2017 against our target to have a 50:50 gender balanced workforce (within per a 10 cent tolerance) across all levels of the business by the end of 2020: > diversity promote to technology Using > > > > 16 I Virgin Money Group Annual Report 2017
Market overview
Housing and mortgages As a UK retail bank we are focused on The housing market was resilient in 2017 and is expected to see modest growth in 2018. Increasing employment and serving domestic customers and continue a gradual pickup in real wages should support the demand to benefit from the resilience of the UK for mortgages. The mortgage market is expected to remain highly competitive in 2018. As a result of ring-fencing, high economy and housing market, although street banks may deploy excess ring-fenced deposits into UK there is a degree of uncertainty in the mortgage lending. We also expect that smaller lenders will outlook. Important regulatory reforms seek to protect their market share. Overall, the mortgage market is expected to see modest which will have an impact on our markets growth, with UK Finance forecasting that gross lending will take effect in 2018, and we look forward be £260 billion in 2018. to the longer term opportunities these will Within specific segments, lending to first time buyers looks create, notably for our digital bank. set to increase further, supported by the tax changes to stamp duty and the £10 billion extension of the Help to Buy scheme. Re-mortgaging will continue to represent a significant volume of overall transactions, as customers look to take advantage UK economy of competitive pricing in anticipation of higher interest rates. Gross domestic product (GDP) growth has picked up in recent In contrast, the buy-to-let market is expected to be flat on quarters, having slowed at the beginning of 2017. As a result, 2017 as the recent regulatory and taxation changes weigh on UK GDP is estimated to have increased by 1.7 per cent in 2017, customer demand. slightly below the 1.9 per cent growth experienced in 2016. Consumption growth has been subdued reflecting the squeeze Savings in real incomes following the depreciation of sterling in the The total retail savings market grew by 3.5 per cent in 2017. aftermath of the EU referendum. Partially offsetting that, net This was despite a reduction in the savings ratio in the last trade has picked up supported by sterling’s depreciation and three years from 9.3 per cent in 2015 to 4.8 per cent during Q3 the strength of global growth. 2017. In part, this behaviour can be explained by the prevailing low interest rate environment, low wage growth and inflation. The level of unemployment in the UK fell to a 42-year low Looking forward, the savings ratio is expected to increase of 4.3 per cent and was one of the major economic success modestly in the coming years to exceed 5 per cent by 2022. stories of 2017. Despite this, real wage growth has remained subdued, as inflation has increased to its highest level in five Recent personal tax changes have influenced customer years. CPI inflation remained around 3 per cent for much of behaviour with the introduction of the Personal Savings 2017, as imports became more expensive as a result of the Allowance reducing the attractiveness of ISA products lower value of sterling. for certain customers. However, for those customers who continue to favour the ISA savings vehicle, typically higher In light of the recovery in GDP growth and the reduction in rate tax payers and customers with historic portfolios, the spare capacity in the economy, the Bank of England increased higher ISA allowance has encouraged larger average balances. interest rates for the first time in a decade in November 2017 in order to bring inflation back towards the 2 per cent The savings market is also expected to adjust to a rising target. Although interest rates are expected to rise gradually interest rate environment following a decade of historically over the coming years, they are expected to remain low by low rates. The market for retail savings balances is expected historical standards. to grow in 2018 at a similar rate to that recorded in 2017. Set against that, there may be increased competition from smaller The HM Treasury consensus for 2018 predicts that the UK lenders who have used Bank of England funding schemes, as economy will continue to grow, albeit at a somewhat subdued those schemes come to an end. rate. The strength of the global economy is expected to be beneficial for the UK and unemployment is expected to remain Credit cards at historically low levels. Inflation is likely to fall back gradually Credit card balances in the UK grew by 5.1 per cent in 2017. and wage growth is expected to pick up. Nonetheless, the Although the Bank of England has highlighted risks from the macro and political environment, including the impact of the rapid growth in consumer credit, a recent FCA study notes UK leaving the European Union, remains uncertain which adds that this growth has been driven by borrowers with higher a degree of caution to our outlook. credit scores who may be less likely to suffer financial distress. Strategic Report Financial Results Governance Risk Management Report Financial Statements Other Information
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The volume and pace of Uncertainty the over remains
The mortgage remains market highly Virgin Money Group Annual Report Annual 2017 Group Money Virgin Ring-fencing Ring-fencing will require large UK banks to separate their core retail banking services from their investment and international banking activities. A side effect of ring-fencing may be an excess ofliquidity for certain large UK ring-fenced banks, which could in turn, lead to heightened competition. regulations address security concerns around a put and authentication permissionstrong and framework around data.customer When taken together, these changes could leadto a fundamental shift in how customers manage both their money and data over the longer term. As a consequence, nature the change potential to the these changes have of competition in UK retail banking. regulatory change, including Open Banking, PSD2, continue will GDPR ring-fencing, We and high. remains to invest in our business and ensure compliance with regulatory changing the landscape. Key challenges challenges Key Competition: competitive. will We continue to deliver outstanding service to our intermediary partners and target growth the in segments. Competition market value-accretive in savings market may increase with the closure of the TFS. diversifying are the funding through We sources of our development of SME and digital banking, and further wholesale our programmes. funding developing environment:Economic potential the future performance with UK economy the of for risks to crystallise if inflation remains higher than wage growth, causing a reduction in households' real earnings. discipline Our lending support continue to will asset delivery the quality and sustainable of returns cycle. the through Regulatory environment:
The breadth
Our refreshed Our
Key opportunitiesKey Optimising lending: mortgage returns in of our customer proposition and our commercial agility commercial our and proposition customer our of positions us well to serve sections of the mortgage market which offer stronger than average risk adjusted returns, such as lending to first time buyers, without compromising underwritingour discipline. regulation: and technology in Changes strategy will allow us to take advantage of the significant regulatorytechnological and shape UK changes will which retail banking in the coming years. PSD2 and Open Banking allow customers to choose to share data from their banking products with third parties. PSD2 and Open Banking customers take new and attract opportunityrepresent to an market share from the high street banks. Our entry into SME banking and the development of our digital bank will enable us to capitalise on these opportunities, and will diversify our support sustainable funding to sources creation of value shareholders.for Developing our credit card offering: will We offer an increasingly differentiated range of credit card products customers. quality credit prime for development Continued of our cash back loyalty programme and the introduction of our Virgin Atlantic Airways affinity range of credit cards will continue to diversify our portfolio and support profitable growth. payments and move fundsfrom a single device. The Open Banking, PSD2 and GDPR and Open Banking, PSD2 componentsThere three major current regulatory are of reform coming into force in Open 2018: Banking, PSD2 and GDPR.The common themes through each of these initiatives protection. consumer and competition innovation, are Customers will be able to bring together all of their financial relationships and data in one place, seamlessly instruct A combination of regulatory concern over the pace of consumer concerns unsecured around and in lending growth indebtedness in the UK is expected to see this rate of growth moderating. The recent Bank of England credit conditions survey has also potential the increase an highlighted for impairments in sector. the across Reflecting a more cautious outlook, we expect the market to continue to reduce the length of interest-free promotional periods on new credit cards being issued. outstandingTotal balances on credit cards are expected to recent below rate trends. a at continue growing 18 I Virgin Money Group Annual Report 2017
Our business model and strategy
ge Po era wer lev ful al br n an tio d ra pe O Operational leverage and Recognised as one cost discipline of Britain's most drives returns trusted banks n io C t u u s b i t Custo o r m t y er m s n s i a e d p e’s be r l n tt m o e C c e Customers can y r o r o e n e o
C f l Straightforward n v n l
interact with E e t a r a i
h C and transparent
c
g c us at their o -
i u product design
t m l
External convenience Quality e SME and Strategic u
m s
M u E Environment Digital Priorities n v f e o i r s ti y er r e on tt e s e’s be n rt C pa Clear risk appetite, orporate
strong balance Prime asset g in sheet, absence portfolios d Strong retail n le L of legacy issues o franchise ty w li a ri supplemented u s -q k h by wholesale ig funding H
Stable funding
External environment Competitive strengths Developing the business Strategic priorities
Our business model is evolving to The core strengths of our business The development of our strategy We are focused on: reflect the external environment enable us to compete effectively will result in two new business > Managing lending growth in which we operate in existing markets as well as to areas, SME banking and digital for value and constantly > The economic outlook has been grasp opportunities in digital and banking. These will broaden our broadening our customer strengthened by global growth. SME banking customer appeal and provide proposition access to a wider pool of banking Our central planning scenario > We are recognised as one of > Maintaining our high quality revenues and funding sources assumes a continuation of Britain’s most trusted banks balance sheet at all times relatively benign economic and operate with one of the In SME banking we have > > Accessing lower cost funding
conditions in 2018 with most admired brands in the UK launched a deposit product as in addition to continued modest economic growth, we look to diversify our sources > We offer customers operational efficiency to
unemployment remaining low, straightforward and of funding. We plan to launch a underpin accretive returns
a stable UK housing market and transparent product design Business Current Account by in the long term the potential for a modest rise the end of 2018 > We acquire prime customers > EBO – we will ensure the in the bank base rate and deliver high-quality asset > The Virgin Money digital bank sustainability of our strategy
> The introduction of ring- growth, primarily through will take advantage of changes through our focus on providing
fencing next year is expected to secured lending in the regulatory environment value to all of our stakeholders increase competitive pressures and customer behaviour to > Our stable funding base draws
in our main product markets, on our strong retail savings extend our market reach within notably in mortgage pricing franchise supplemented by retail banking services > The volume and pace of wholesale funding capability > We will explore value accretive regulatory change remains high opportunities to develop our > A low risk appetite is reflected
including Open Banking, PSD2 in our low cost of risk investment business and GDPR > Multi-channel distribution
> The opportunity exists to allows customers to interact
win customers from the high with us at their convenience street banks through digital
transformation > Efficiency and cost discipline result in operational leverage and enhanced financial returns
Lending Deposit taking Investment Insurance Existing business areas Mortgages & credit cards Savings & Basic Bank Account Investments & pensions Life & travel insurance Strategic Report Financial Results Governance Risk Management Report Financial Statements Other Information
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Virgin Money Group Annual Report Annual 2017 Group Money Virgin
We will continue to deliver excellent customer service across a broader customer excellent will continue to deliver We proposition we need in colleagues to develop and attract the talent further will invest We Foundation to operate nationally Virgin Money will roll-out the We corporate partners with our relationships will develop deeper We account per cent lower 40 per will be approximately operating costs Digital bank business areas existing than our funds of cost superior will drive deposit base customer Diversification of funding of sources to serve and new cost proposition, lower A broader will drive enhanced returns Asset quality and balance sheet strength will remain at the heart of our at the heart of will remain and balance sheet strength Asset quality business model and strategy impairment will support management credit risk focus on disciplined Our performance through the economic cycle cent at all times 12 per will remain above The CET1 ratio
We will continue to prioritise returns and operate within a stable risk appetite risk within a stable will continue to prioritise returns and operate We businesses card mortgage and credit our we continue to grow as increase will significantly proposition and digital bank SME Developing our of sources numbers and drive new customer markets, grow accessible our funding and income deposits £10 billion of funding franchise targets our The development of launch years of within five sources from new
Creating future value value Creating future EBO By delivering to our other stakeholders, we reinforce our ability to deliver sustainable shareholders. for value > > > > Returns Returns > > > Quality > > > Growth Growth > > >
EBO Customer NPS Customer +40 Colleague engagement score 76% Giving donations Money Virgin £95 million NPS Intermediary +61 Returns Returns Equity on Tangible Return 14.0% Banking NIM 1.72% Cost:income ratio <50%) ratio 52.3% (exit tax before Underlying profit £273.3 million Quality risk Cost of 13 bps CET1 ratio 13.8% ratio Leverage 3.9% Growth Growth customers of Number 3.34 million loans Customer £36.7 billion Deposit balances £30.8 billion share per TNAV £2.97 2017 key performance performance 2017 key indicators 20 I Virgin Money Group Annual Report 2017
Delivering for stakeholders
> The number of customers in our insurance lines was lower than in 2016 as we focused on offering higher quality products at Customers lower volumes and the brand continued to support retention of loyal customers at renewal; > The proportion of new product sales made to existing We delivered further significant customers increased to 12.2 per cent, from 10.7 per cent improvements in customer advocacy in in 2016; and 2017. More customers than ever before > As a result of improving the Virgin Money Giving (VMG) would recommend Virgin Money to customer journey we now have 1.4 million registered users of our not-for-profit online donation service. their friends and family, with our overall Net Promoter Score (NPS) increasing to Net Promoter Score (NPS) Overall customer NPS improved to +40, up from +29 at 2016. +40 in 2017 2017 +40 Aim We provide our customers with good value products, 2016 +29 supported by outstanding service, with the aim of driving stronger customer relationships, deeper product engagement 2015 +19 and increased cross-product holdings. Customer achievements 2017 Increased our customer base to > We delivered 8.2 per cent growth in mortgage customer numbers during the year, to more than 350,000. Supported by 3.34 million investment in our digital capability, we improved retention at maturity to 72 per cent, from 68 per cent in 2016. Increased total registered VMG users to > We now have 1.2 million customers in our credit card business following another year of strong growth. Customer 1.4 million engagement increased as we improved our online service for mobile usage and we now regularly have more than one million visits per month to our online servicing platform. Virgin Money Back, our customer cashback platform, supported an 8 per cent increase in average retail spend per active account; > We continue to offer our 1.3 million savings customers both good value and sustainable savings rates in the context of the market. This approach continues to deliver improvements to our average cost of retail funds whilst supporting strong retention levels. Average savings accounts per customer increased to 1.3, average balances per customer rose to around £24,000, and retention levels on fixed rate maturities remained strong at 89 per cent; > Our investment and pensions customers continued to demonstrate brand loyalty and engagement. While customer numbers were stable year-on-year, we achieved a 13 per cent increase in the number of active investment customers;
Virgin Money Lounge, Edinburgh Strategic Report Financial Results Governance Risk Management Report Financial Statements Other Information
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52% use their mobile their use access to and products services
78% of our sales are are sales our of digital through channels Virgin Money Group Annual Report Annual 2017 Group Money Virgin 28 million visits website Stores and Lounges and Lounges Stores continueWe to value face-to-face interactions with our customers. Alongside our network Stores, of 74 we aim to offer our customers a differentiated banking experience with access to our exclusive customer Lounges. Our seven Lounges continue to deliver strong customer satisfaction with an NPS of +87 and Stores co-located with a Lounge broadly outperform the overall network based on sales performance. As a result of this success we plan to open our eighth Lounge in Cardiff in 2018. Supported Store our national by footprint and contact centres, our be to continued channels digital the growing in factor a significant effectively. cost business Digital products core in engagement Our digital channels continued to be a significant factor in growing the business cost efficiently Our website in2017. remains the most popular channel, with over 28 million website visits, up from 22 million 78 per in 2016. cent of sales mobile use of the and year delivered digitally the during were devices to access products and services increased to per 52 cent of all our digital interactions, up from 50 per cent in 2016. Our aim is to offer our customers access to our products and services using the device of their choice. will We continue to across journeys customer and capability digital our improve current platforms and we are focused on meeting the needs of our customers in a rapidly evolving digital landscape. continueWe to attract a younger, more affluent and digitally active customer base and our new digital bank will make it simpler, faster and more convenient to meet their financial needs.
Virgin Atlantic Airways retail financial services Airways Virgin Atlantic
mortgage retention and continue of high levels our on Build the mortgage market. This of to focus on prime segments build time buyers and custom first for will include support buy-to-let the specialist We also expect to enter mortgages. market during 2018; portfolio landlord our Launch to a propositions will offer partnership. The partnership heavily who are already customers of significant number Virgin brand; with the engaged through good savers with our Strengthen the relationship loyalty; customer rewards products and pricing that value broaden our we Virgin brand as the of Leverage the strength range in 2018; SME savings value through and growth significant potential for Build and pensions business; investment developing our with ourVMG relationships deeper Build base by customer financial needs beyond charitable looking to meet their donations; year, in this digital bank our an initial beta model of Launch and in 2019; full launch of advance financial relating to accessibility, Continue to recognise issues inclusion and responsible lending.
Customer priorities for 2018 prioritiesCustomer 2018 for We will: > > > > > > > > 22 I Virgin Money Group Annual Report 2017
Delivering for stakeholders
> We were accredited as a Best Employer for Race by Business in the Community. Colleagues Colleague diversity data We believe a diverse workforce will drive better business outcomes and create a workplace that is engaging, Virgin Money’s success is built firmly on inclusive and accessible. We saw increased minority the commitment, skill and attitudes of representation across all groups in 2017. The table below all our people and our shared purpose details our colleague diversity and the progress made in 2017. of being a better bank which makes 2017 2016 ‘everyone better off’. Gender Board members Female 4 (40%) 3 (37%)
Male 6 (60)% 5 (63%) Aim Senior managers Female 42 (29%) 31 (21%) Our colleagues are integral to our success; it is through their (excluding CEO) engagement and advocacy that we are able to deliver strong Male 105 (71%) 114 (79%) and sustainable business performance. We aim to provide an environment which nurtures a high performing, diverse Colleagues Female 1,854 (56%) 1,758 (56%) and committed workforce where colleagues can reach their Male 1,436 (44%) 1,381 (44%) full potential. Percentage of colleagues who identify as LGBT+ Colleague achievements 2017 LGBT+ 3.5% 3.2% Investing in colleague development > We launched a digital degree-level apprenticeship as part of Percentage of colleagues from an ethnic minority a wider programme to extend our use of apprenticeships; Ethnicity 4.9% 4.4% > We gave colleagues access to our online learning materials Percentage of colleagues who disclose they have a disability through their mobile devices; and Disability 4.1% 3.0% > We launched two new development programmes targeting Colleagues aged 50 or more colleagues at different stages of their careers, complementing Multigenerational 568 546 our award-winning Future Business Leaders programme. Note: The LGBT+, ethnicity and disability data is derived from the annual colleague survey, Building colleague engagement for which the 2017 response rate was 89 per cent of permanent colleagues. > Colleague engagement remains strong at 76 per cent; The appointment of Irene Dorner as Chair from April will result > We launched our new internal mentoring programme, in a 50:50 gender balanced Board in 2018. including maternity and diversity related mentoring; and Gender Pay Gap > We launched an Aspiring Managers programme, to prepare Virgin Money welcomes the UK government initiative to future people managers ahead of promotion. improve equality through collecting and reporting gender pay data. Our mean gender pay gap reduced by 10 per cent, to Creating a diverse workforce 32.5 per cent during 2017. > We signed the Time to Change pledge, aimed at making Virgin Money a better place to work for colleagues who have a At Virgin Money men and women are paid equally for doing mental health disability and we achieved the highest (3rd tier) the same or similar jobs. The Virgin Money gender pay gap is Disability Confident accreditation; caused by under-representation of women in senior roles and under-representation of men in customer service positions. > We signed the Business in the Community pledge to increase The under-representation of women in senior roles accounts by 12 per cent the number of older people (defined as over 50 for approximately one-third of the gender pay gap. years) we employ by 2022; The under-representation of men in customer service > We were ranked 95th in Stonewall’s Top 100 companies positions accounts for approximately 50 per cent of our workplace index for LGBT+ inclusivity, advancing 244 places gender pay gap. within a year, reflecting our commitment to being an LGBT+ friendly employer; and
Strategic Report Financial Results Governance Risk Management Report Financial Statements Other Information
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Virgin Money Red Hot Awards 2017 Red Hot Awards Virgin Money Virgin Money Group Annual Report Annual 2017 Group Money Virgin drive greater diversity and inclusion with our corporate with our inclusion and diversity drive greater with the British ‘The Accelerator’ partners, including launching ethnic progression of to enable greater Awards Business Black managers. minority extend our support to enabling flexible working, including the to enabling flexible support extend our working from home; and to improve technology use of continue to promote Virgin Money as an inclusive employer, as an inclusive employer, Virgin Money continue to promote to drive a recruitment strategies setting targets and deploying in roles; candidate interest of diversity greater obtaining interim feedback more regularly to enable to enable more regularly obtaining interim feedback priorities quickly. us to action new
Initiatives relating to gender equality are covered in the Women in Finance update on page 14. > > Creating a diverse workforce a Creating Business decision making and colleague engagement will inclusive environment. an providing enhancedbe by Our diversity and inclusion activity will continue to be overseen by the People Director, with executive sponsors for each minority group. we improvedIn 2017 representation across all minority groups (see table on page maintain 22). To this progress in 2018, we will: > >
work experience programme; and experience work
promoting our enhanced pay approach to shared approach pay enhanced promoting our parental leave; enabling colleagues to make a difference through the enabling colleagues to make a difference our roll out of provide coaching skills programme to new expanding our colleagues; tailored development for an online tool kit to enable personalised career launching planning; and maternity programme for development expanding our in 2017. pilot scheme a successful returners following
> Colleague priorities for 2018 prioritiesColleague 2018 for development colleague Investing in willWe continue our investment in colleague through: development > > > commitment colleague Building willWe continue to seek increasing levels of engagement through: colleagues all from > It remains a priority to achieve gender balance throughout the gender throughout balance priority achieve a remains It to company, achieving 50:50 balance by the end of 2020 (within per10 cent) at all levels. As we make further progress towards a 50:50 balance, our gender pay gap will continue to reduce. Details of our gender pay gap can be found on our website. 24 I Virgin Money Group Annual Report 2017
Corporate Partners
We work with a number of corporate partners to provide mortgages, investments, insurance and currency services to our customers.
Intermediary partnerships remain a key part of our strategy. Improvements to our award-winning intermediary proposition in 2017 led to new highs in our intermediary NPS, which increased to +61 from +55 in 2016. We also operate strategic partnerships with established providers to provide a broader range of financial services products.
Corporate Partner achievements 2017 Corporate Partner priorities 2018 > Won the ‘Best Lender for Partnership with Mortgage Club’ > Maintain outstanding levels of service to our network at the L&G Mortgage Club annual awards for the third year of professional mortgage intermediary partners in an running; increasingly competitive mortgage market; > Awarded ‘Five Stars’ in the Mortgage category at the Financial > Launch our new strategic partnership with Virgin Atlantic Adviser Service Awards; Airways. The first products will be launched in the first > Recognised as the ‘Best Mortgage Lender’ at the Mortgage half of 2018; and Strategy awards; and > Build on the strength and success of our partnership > Partnered with BGL Group to relaunch our Life Insurance with Manchester United Football Club. proposition.
Mortgage balance growth to £33.7 billion up 13% in 2017 Working with Virgin Money to launch their new 2017 2016 2015 life insurance product is a natural partnering of Intermediary Net Promoter Score +61 +55 +40 two innovative brands which both put the customer at the very heart of the proposition. Mortgages Balances (£bn) 33.7 29.7 25.5 Peter Thompson, Group Director, BGL
We're pleased to be partnering with Virgin Money on their Custom Build proposition. Together with our intermediary partners we'll give customers real choice and put them in control of designing and building their dream home. Rachel Pyne, Operations Director, BuildLoan Strategic Report Financial Results Governance Risk Management Report Financial Statements Other Information 25
I Virgin Money Group Annual Report Annual 2017 Group Money Virgin
. Anti-Bribery statement have a comprehensiveWe Anti-Bribery policy in place which complies with laws and regulations wherever we operate, and applies to all directors, colleagues, and anyone else acting on our behalf. All colleagues, contractors,including anti-bribery annual complete training and are encouraged to report confidentially any bribery. suspected of instances When we engage in business relationships with third parties,we make sure they have the necessary skills and experience to provide the services we pay them All for. and reputable, reliable be to business partnersour have charge a fair market price for their services. expectWe all our existing and potential business partners to have the same ethical standards as Virgin Money. They must comply with the UK Bribery Act and be able to meet our due diligence requirements. read our Anti-BriberyTo statement in full please visit virginmoney.com Human RightsHuman Modern and Slavery statement Virgin Money has zero tolerance of slavery, servitude, forced labour and human trafficking (Modern Slavery). areWe committed to conducting business withhonesty integrity everyone treating and and dignity and with respect. Aimed at further reducing the risk of slavery within our supply chain, we have focused on deepening understandingour risks the delivered of and involved training to key areas of the business. This has driven and sourcing our further improvements to and review procurement processes. will We continue to measure the effectiveness of our approach and improve the mapping of our supply chain to identify areas of risk. The policy applies to both Virgin Money colleagues and the employees of our partners and suppliers. New suppliers are required to sign a Code of Conduct stating our minimum expectations ofhuman rights standards and labour conditions with which providers are expected to treat employees. read our Modern To Slavery statement full please in visit virginmoney.com. 26 I Virgin Money Group Annual Report 2017
Community
We are committed to supporting the communities in which we work to help them flourish, both socially and economically.
Our work covers four key areas – fundraising; investing in education; employability and enterprise; and supporting colleague engagement in their local communities.
Community achievements 2017 Community priorities 2018 > £95 million was donated to charities through Virgin Money > Continue to invest in Virgin Money Giving to help charities and Giving, our not-for-profit online donation service; fundraisers raise more for good causes in the UK; > Runners in the 2017 Virgin Money London Marathon raised > Support our Charity of the Year for 2017/2018 and the official £62 million for charity, setting a new world record for an charity of the 2018 Virgin Money London Marathon, Teenage annual, single day charity fundraising event for the eleventh Cancer Trust; successive year; > Extend the reach of The Virgin Money Foundation beyond the > Our Charity of the Year for 2016/2017 and the official charity North East of England, and launch the Heart of the Community of the 2017 Virgin Money London Marathon was Heads Fund through Virgin Money Lounges; Together. As well as changing the conversation on mental > Continue to invest in a range of programmes which support health, they raised £1.94 million through the partnership young people in developing financial, entrepreneurial and with Virgin Money, including £250,000 raised by colleagues; employability skills; and > The Virgin Money Foundation awarded grants of nearly > Support colleagues engaging in national and local community £3 million in 2017 to organisations working in areas including projects and use their business skills to help young people and housing, employability, youth social action and financial young businesses flourish. inclusion; > Our support for the ‘LifeSavers’ financial education programme has helped over 14,000 young people learn more about money, and our Make £5 Grow programme gave over 24,000 young people the experience of starting a small business; > Our ‘Strive to Thrive’ programme has helped 600 young people aged 14 to 19 increase their chances of finding employment through improving their confidence and self-awareness and giving them employability and life skills; and > Colleagues volunteered 1,555 days to support community activities.
More than £600 million raised through Virgin Money Giving, since launch in October 2009
Make £5 Grow Strategic Report Financial Results Governance Risk Management Report Financial Statements Other Information 27
I Olympic Athlete, GBR Jazmin Sawyers, Photo: Virgin Money London Marathon Virgin Money Photo: congratulates the medalists of the Mini Marathon. of congratulates the medalists Virgin Money Group Annual Report Annual 2017 Group Money Virgin 28 I Virgin Money Group Annual Report 2017
Managing and reducing environmental impacts
We are committed to taking positive action to eliminate the impact our activities have on the broader environment and continue to target Net Zero Greenhouse Gas (GHG) Emissions by 2030.
Environment achievements 2017 Environment priorities 2018 > Secured 100% renewable energy for electricity contracts > Improve our property efficiency by investing in ways to reduce within our control; our energy and water usage and the way we dispose of waste; > Increased awareness of environmental initiatives across the > Build colleague awareness and engagement on the measures Company, including the provision of new tools such as that they can take to support and contribute to our ‘Skype for business’ which reduces the need for corporate sustainability agenda; travel; > Build upon the insight we gained from the CDP submission > Completed our first Carbon Disclosure Project (CDP) by analysing and interpreting our emissions data to ensure submission and worked with industry experts to identify we optimise energy usage; and how environmental issues relate to our business; and > Further review our policies and procedures with a focus on > Incorporated environmental assessments into our reducing the environmental impact of our corporate travel procurement process to ensure suppliers understand the part and the goods and services we buy. they can play in reducing their impact on the environment.
Managing our emissions Emissions The Group is required to report on GHG emissions under the The data gathering process for figures within our Scope 1 Companies Act 2006 (Strategic Report and Directors’ Report) and 2 reporting is continuous and calculated using the most Regulations 2013 (the Regulations). The Group follows the accurate information available at the time. If more accurate principles of the GHG Protocol Corporate Standard and the data becomes available or updated CO2e emission factors are Department for Environment, Food and Rural Affairs (DEFRA) applied, this may lead to a restatement of data. Voluntary Reporting 2012 Guidelines (the Guidelines) to GHG emissions CO e tonnes calculate its emissions in Scope 1, 2 and 3. We have reported 2 comprehensive data on GHG emissions within Scope 1 and 2, Scope 2017 2016 and business travel within Scope 3, since 2014. Scope for disclosure Scope 1 1,741.2* 1,753.8 > Reported Scope 1 emissions: cover emissions generated from the gas and oil used in all buildings from which the Group Scope 2 4,619.2* 4,933.0 operates; emissions generated from Group-owned vehicles used for business travel; and fugitive emissions arising from Scope 3 1,027.2 998.8 the use of air-conditioning and chiller/refrigerant equipment to service the Group’s property portfolio; Total 7,387.6 7,685.6 > Reported Scope 2 emissions: cover emissions generated from the use of electricity in all buildings from which the Group operates; and > Reported Scope 3 emissions: relate to business travel undertaken by all colleagues using rail, private vehicles, hired vehicles, contracted taxi services and air travel. Strategic Report Financial Results Governance Risk Management Report Financial Statements Other Information 29
I Virgin Money Group Annual Report Annual 2017 Group Money Virgin
2016 19.6 56% 5.7m 567.6 2% 12.7 e 2
2.66 tCO 2016 2017 10.8 21.8 58% 5.8m 508.2 2% e 2
2017 2.50 tCO Cubic metres per FTE per metres Cubic Stated in Gwh Stated in Gwh sources % from renewable Total miles travelled Tonnes produced % sent to landfill lower than a reasonable assurance agreement. A summary of the work PwC performedis included within their assurance opinion. Non-financial performanceGHG quantificationinformation, in particular, is subject to more inherent limitationsinformation. than financial It is important to read the data in the context of PwC’s full virginmoney.com at statement available guidelines reporting Money’s Virgin and Water Water Energy Travel Waste Scope GHG emissions FTE average per
Energy – % renewable energy use stated for office, Store and Lounge locations. Travel – includes all air, rail, taxi and public transport processed through eithercorporate our travel provider or claimed through personal expenses. Waste – includes trade and secure waste for offices, Stores and Lounges. Water – consumption is for metered sites only. 1 The level of assurance provided for a limited assurance engagement is substantially Use of resources The table below shows actual consumption in 2017 compared with 2016. Although not required by the Regulations, we appointed Regulations, the we required by Although not PricewaterhouseCoopers LLP (PwC) to undertake in 2017 a limited assurance engagement using the ISAE 3410 assurance standard over the Scope 1 and 2 GHG data highlighted in this report with a (*). Their assurance report is virginmoney.com¹. on available Independent assurance Independent assurance Intensity ratio have chosenWe to use an intensity ratio of GHG per Full Time (FTE).Equivalent FTE is straightforward verify and calculate to and also normalises consumption in a growing business. We are encouraged by the reduction in this ratio in 2017. 30 I Virgin Money Group Annual Report 2017
Risk overview
Risk management
Effective risk management is a core part of our strategy. Achievements in 2017 The Board-approved risk appetite reflects our tolerance for Our key achievements during 2017 included continued risk in pursuit of our strategic objectives. It is designed to rigorous focus on credit quality, the strength of our capital and achieve an appropriate balance between risk and reward. funding bases, significant programmes of work addressing key Risk appetite is embedded in the business through delegation regulatory initiatives and further strengthening our framework of authority from the Board to the Executive. Our risk for the management of cyber-crime and financial crime risks. management approach is fully aligned with Board risk appetite, Credit regulatory requirements and industry good practice. Risks are The application of strict affordability requirements, robust identified, managed and mitigated using our risk management credit decisioning and prudent underwriting standards across framework (see page 131). Our risk-aware culture and strong, our mortgage and credit card portfolios ensured that asset independent Risk function help to ensure adherence to our risk quality performance was ahead of our expectations. This is management framework. An effective governance structure, reflected in our low overall cost of risk of 0.13 per cent (2016: rapid escalation of threats and the sharing of information 0.13 per cent). We are responsive to the changing macro- across the Group results in a timely response to emerging risks. economic environment and regularly refine our credit risk We use a ‘Three Lines of Defence’ model which describes management approaches. clear accountabilities, appropriate segregation of duties and Mortgage lending grew by 13.2 per cent to £33.7 billion effective independent assurance. The principal risks which during 2017, despite increased competition from incumbent could impact the delivery of our strategy are outlined on lenders and new entrants looking to enhance their market pages 36 to 37. share. The mortgage portfolio represents 91.6 per cent (2016: As a UK retail bank we are focused on serving domestic 92.3 per cent) of gross loans and advances to customers. customers. We are subject to risks arising from macro- Prime residential lending grew to £27.3 billion during 2017, economic conditions in the UK, geopolitical uncertainty, the representing 81.1 per cent (2016: 81.6 per cent) of total competitive environment and new structural and regulatory secured loans. changes which will come into force over the next few years. > The high quality of our mortgage business is reflected in our Our ongoing focus on maintaining a strong retail deposit low arrears levels. Secured 3+ arrears levels were 0.12 per franchise and high-quality lending portfolios is supported cent at the end of 2017, compared to 0.15 per cent in 2016, by our robust approach to both financial and non-financial substantially below the latest UK Finance industry average of risk management. 0.82 per cent. Additionally, the proportion of secured assets classified as neither past due nor impaired remained stable during 2017 at 99.0 per cent (2016: 99.1 per cent); > The consistent application of our lending criteria and robust underwriting gives us confidence that our mortgage book would be resilient in the event of a downturn. In 2017, we further strengthened our lending criteria in relation to buy- to-let properties, which constitute 18.9 per cent (2016: 18.4 per cent) of total secured loans; > The indexed portfolio LTV remained stable at 55.8 per cent at the end of 2017 (2016: 55.4 per cent); and > Our low cost of risk for mortgages has remained stable at 0.01 per cent (2016: 0.01 per cent). During 2017, our credit card book, net of impairments grew to £3.0 billion, representing a market share of 4.1 per cent. The credit card portfolio accounts for 8.4 per cent (2016: 7.7 per cent) of total loans and advances to customers. Strategic Report Financial Results Governance Risk Management Report Financial Statements Other Information
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Virgin Money Group Annual Report Annual 2017 Group Money Virgin offering;
programmes;
Retail deposits increased by 9.6 per cent during the year to £30.8 billion, with a lower cost of funds. This was achieved through close management of pricing and product mix. The retail product mix included a higher proportion of fixed rate products, increasing overall contractual tenor. Almost nine out of ten fixed rate savings customers opted to stay with us at maturity, highlighting the strength of our retention Our strong funding position is reflected in a liquidity coverage ratio of 203 per per cent 154 cent) (2016: as at December31 2017; Our loan-to-deposit per ratio cent increased to 119.1 per from cent December 114.5 at 31 during in 2017, 2016, line with internal limits per of up to cent; 120 In September, we successfully completed a further issuance of Residential Mortgage Backed Securities (RMBS), raising million £745.9 in both USD and GBP tranches. Wholesale funding supplements our core retail deposit base and cost of funding. Wholesale funding also helps to extend tenor and ensures we have appropriate diversification in the funding base; During the we made year, further drawings from the BoE FundingTerm Scheme (TFS) taking overall drawings at December31 to £4.2 billion. 2017 In parallel, we repaid £650.2 million of Funding for Lending Scheme (FLS) funding. This low-cost funding creates additional lending capacity and supports our overall funding plan;and the FinancialIn July 2017, Conduct Authority (FCA) confirmed that our Covered Bonds application had been approved. expect We to make our inaugural issuance in 2018.
Our funding strategy is retail deposit-led. hold We high- quality liquid assets (HQLA) to address the liquidity needs of the business and, in addition to retail deposits, we diversify our funding through a number of wholesale funding > > > > > >
Revised credit card scorecard cut-offs were implemented Policyin restrictions April 2017. were made to in May 2017 reinforce our focus on the acquisition of customers with low levels of indebtedness. Growth in credit card balances continues to be driven by targeting low risk customer segments. For instance, over 98 in per 2017 cent of new balance transfer customers were booked at an expected loss rate of less than 1 per cent; Credit card book quality remained stable with 98.6 per cent 98.7 (2016: per cent) of the book currently classified as neither past due nor impaired. Unsecured arrears 2+ levels remained low at 0.88 per cent 0.78 (2016: per cent) with the small increase during primarily 2017 due to expected increases in arrears levels on balances originated during as and these 2016 2015 cohorts mature. Arrears levels remain well within our forecast position and compare favourably to industry benchmarks; and Our low cost of risk for credit cards per of 1.51 cent (2016: per1.70 cent) reflects a rigorous approach to underwriting, account management and credit decisioning, supported by the benign economic environment. ourAs Common December at 31 Equity 2017, Tier 1 (CET1) ratio was 13.8 per cent 15.2 per (2016: cent), our total capital ratio per was cent 20.4 18.1 (2016: per cent), and our leverage ratio was 3.9 per cent 4.4 (2016: per cent). Movements reflect in 2017 the utilisation of capital to support further lending growth and investment in business development. All capital ratios remain significantly above the regulatory minima.
In the February Bank of England 2017, (BoE) notedthat unsecured lending standards had fallenacross the market. In contrast, the quality of our credit card lending has remained strong. Average credit card behavioural scores have improved during the year as we continue to focus on monitoring customer behaviour and book performance closely. Application quality is strong and there is a growing gap between our benchmarked asset quality and market averages. However, we recognise the potential for economic headwinds and during the first halffurther of 2017 tightened our lending criteria. > > > funding Capital and Maintaining a well-capitalised business supports balance sheet growth, credit ratings and regulatory requirements. Our capital base is managed to ensure that the business is well placed to react to current and forecast economic, market and regulatory conditions, as well as any material downturn in the economy. > 32 I Virgin Money Group Annual Report 2017
Risk overview
Risk management
Regulatory initiatives The FCA continues to emphasise the need for firms to ensure Our work during the year focused on the following they have adequate and effective systems and controls regulatory changes: to manage financial crime risk. In 2017 we continued to develop our strategic financial crime programme. This > During 2017, the FCA published its approach to implementing the revised Payment Services Directive programme is designed to enhance our systems and (PSD2), which came into force on 13 January 2018. As well controls and, during the year, delivered improvements to as promoting innovation, PSD2 aims to improve consumer client screening, transaction monitoring solutions and due protection, increase the security of payments, and reduce diligence procedures. the cost of payment services; In addition, we implemented our approach to the EU’s Fourth Money Laundering Directive which was transposed into > The General Data Protection Regulation (GDPR) provides an updated EU data protection framework to replace the UK law on 26 June 2017 as the Money Laundering, Terrorist existing 1995 Data Protection Directive (the Directive). Financing and Transfer of Funds (Information on the Payer) GDPR will come into force in May 2018; Regulations 2017. During 2017 we made significant investment in undertaking Outlook the required preparatory work in relation to the above The macro-economic environment, strong credit change programmes. management of our lending portfolios, strength in capital and funding and proactive engagement with forthcoming On 3 April 2017, the FCA published a consultation paper > macro-structural and regulatory change will be the key areas setting out proposals for new rules and guidance to of focus in 2018. address persistent credit card debt. These proposals complement the remedies arising from the Credit Card Macro-economic environment Market Study published in 2016, which aim to reduce The UK economy and housing market remained resilient the number of customers with problem credit card debt. in 2017. We continue to see strong customer demand and While we have very limited exposure to such customers, no evidence of material changes in customer behaviour. we are working with the FCA to trial strategies relating However, potential risks could crystallise if inflation remains to the identification of and support for customers in higher than wage growth, causing a reduction in households' persistent debt; and real earnings. Lower real earnings could in turn reduce consumer spending which, combined with a potentially The final report in relation to the FCA Asset Management > more uncertain macro environment, leads us to remain Market Study was published in June 2017. The package cautious in our outlook. We will continue to monitor key of remedies is focused on providing increased investor exposures in light of the prevailing economic outlook. We protection, driving price transparency and improving have implemented additional oversight activities, alongside the effectiveness of intermediaries for both retail and contingency plans, which are designed to respond to and institutional investors. We endorsed these and will mitigate the impact of adverse macro-economic conditions implement the limited changes required to achieve full that may emerge. compliance with the recommendations. The Bank of England increased interest rates from 0.25 per
Cyber-crime and financial crime risk cent to 0.50 per cent in November 2017. Our expectation is We have a well-developed Cyber Security Strategy to manage for gradual further rate increases over the next three years. the increasing risk of cyber-crime. During 2017 we deployed Low wage growth, and higher inflation, may put pressure a security risk framework that enables us to manage on some household budgets and we remain alert to signs of exposures in line with internationally recognised security financial strains on our customers. Changes to central bank standards. We improved our network security controls to rates can represent a risk to future financial performance. We protect us against emerging security threats and improved have an ongoing programme of stress testing to assess our security advice to colleagues. resilience to changing macro-economic conditions. Strategic Report Financial Results Governance Risk Management Report Financial Statements Other Information 33
I Virgin Money Lounge, Sheffield Virgin Money Virgin Money Group Annual Report Annual 2017 Group Money Virgin 34 I Virgin Money Group Annual Report 2017
Risk overview
Risk management
Maintaining strong credit quality > The commercial performance of our credit card portfolio Our focus on asset quality will continue in 2018. Credit policy is exposed to potential changes in expected consumer and decision systems are regularly reviewed and tested to behaviour. We will monitor this closely and take timely ensure they respond to changes in customer and competitor action to respond to any observed or anticipated changes. behaviours, maintaining the quality of the portfolios. Capital and funding Management of the mortgage portfolio: Housing market We will continue to build on our core retail deposit base and changes play a crucial part in the development of our develop our SME offering which commenced in January 2018 business. During 2017, UK house prices remained resilient. with the launch of our Business Deposit Account. We will also target new sources of funding following the launch of our > Low unemployment and record low mortgage rates support consumer affordability while supply shortages continue digital bank which aims to increase our access to the current to support house prices. Although the potential for the account and primary savings markets. weakening of regional house prices exists, we have well- Although we will remain a predominantly retail funded established early warning indicators and will continue to bank, we do also have a well-established wholesale funding monitor and manage our exposure to regional house price programme. With the Bank of England funding schemes we variations and potential areas of weakness; have used coming to an end, we have put in place a carefully structured funding plan to avoid undue re-financing risk. We > A number of measures relating to the housing market were announced in the Autumn Budget, including a permanent will continue to diversify and build out our funding sources in stamp duty land tax relief for first-time buyers. We the coming year in line with the long term aim of wholesale increased lending to first-time buyers by 20 per cent during funding providing up to 20 per cent of total funding. In July 2017 and this will continue to be a focus in 2018; 2017 we received authorisation from the FCA for a regulated covered bonds programme, and expect that our inaugural > The PRA introduced stricter stress testing for landlords with issuance will take place this year. We also expect to access four or more mortgaged buy-to let properties, effective RMBS markets again during 2018. As we work towards the from September 2017. We have taken a conservative full implementation of minimum requirements for own funds approach to applying these minimum standards. Further and eligible liabilities (MREL) on 1 January 2022, we will begin information can be found in the Risk Management Report to issue further unsecured funding through our established on page 135; and Global Medium Term Note programme. > The mortgage market saw heightened competition in We benefit from AIRB models in calculating Pillar 1 capital for the second half of 2017 and this may continue in 2018. the mortgage portfolio. Ensuring that these models remain We will continue to focus on our competitive strengths well calibrated to portfolio performance and aligned to the and will manage volumes in order to protect asset most recent regulatory guidance will be key in 2018. quality and returns. Macro-structural changes Management of the credit card portfolio: We will continue Our strategic planning addresses the new structural and to focus on strong credit management of our credit card regulatory changes which come into force in the coming years: exposures. A rise in unemployment or pressure on customer affordability could lead to increased impairments. We will > A capital conservation buffer of 0.625 per cent was continue to monitor this closely in 2018. introduced on 1 January 2016, and increased to 1.25 per cent on 1 January 2017. This will increase each year to a > Our new co-branded partnership with Virgin Atlantic maximum of 2.5 per cent in 2019. During 2017, the Bank Airways will encourage high-quality credit card growth. It of England increased the countercyclical buffer from aims to materially increase retail spend and provide further 0 per cent to 0.5 per cent of risk-weighted assets. This will diversification of the credit card customer base; come into force in June 2018. A further increase of 0.5 per > We will continue to grow our credit card portfolio in a cent, to 1.0 per cent, will come into force in November 2018, controlled manner, given our assessment of market subject to review in the first half of 2018. These changes are conditions and our view of risk and reward; and fully reflected in our capital and funding plans; Strategic Report Financial Results Governance Risk Management Report Financial Statements Other Information
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Virgin Money Group Annual Report Annual 2017 Group Money Virgin
participant;
time, the impact will be most significant for the personal current account market, in which we are not currently a material FCA Strategic Review of Retail Banking Business Models: The FCA are reviewing the business models used in the retail banking sector and evaluating the impact of changes on competition and conduct. The FCA engaged with relevant financial service providers during and will 2017 provide an update in the first half of 2018; FCA Mortgage Market Study: In December the 2016, FCA published the terms of reference of their Mortgage Market Study. responded We to an information request in March and await2017 the findings of the interim report which is due to be published in March and 2018; FCA Interest Only Thematic Review: In January the 2018 FCA published the findings of their Thematic Review into Interest Only customers. Their response acknowledged the progress that lenders had made and emphasised the need for customers to contact lenders for further support. wereWe aware of all points raised by the FCA and are addressing them within existing programmes of work.
> > > Cyber-crime Cyber-crime remains a material risk for all banks and we recognise the pace of change in the external threat environment. will We continue to monitor the external threat landscape and develop our capability to protect against cyber-crime through ongoing enhancement of our control environment and protections. will We continue to develop our strategic financial crime programme and in 2018 further enhance our anti-money laundering capabilities. Third party administration Outsourced relationships with parties which support the credit card, investment and insurance businesslines, such as DST (formerly IFDS) for unit trust management and TSYS/ TMS for our credit card business, are fundamental to the success of the business and remain a significant area of management focus. Reliance on key corporate partners and strategic suppliers involves the potential risk of disruption to service arising from the failure of a third party. Thorough risk assessment during the on-boarding process, and robust ongoing oversight, are key to managing these outsourced relationships.
Minimum Requirements for Own Funds and Eligible Liabilities (MREL) will be fully phased in by 1 January 2022. The Bank of England provided MREL guidance, including transitional arrangements, in late Prior 2016. to December31 our MREL 2019 requirement will be equal to our minimum regulatory capital requirements. From 1 January 2020 until December 31 our MREL 2021, requirement will be equal per to 18 cent of our risk- weighted assets. This guidance has been fully reflected in our capital and funding plans; The Financial Services Banking Reform will Act 2013 result in the ring-fencing of retail banking operationsto separate them from investment banking activities. We are in the process of agreeing our detailed ring-fence compliance plans with the PRA and do not anticipate any material change to our structure or business model as a result. will, We however, have to participate directly in inter-bank payments systems and work is well advanced to achieve this; IFRS 9 will be implemented and in will 2018 result in a new approach to provisioning and additional disclosure requirements. have developed We new models and business practices to meet these requirements. Additional information regarding IFRS 9 can be found in note to37 the financial statements; and The Basel Committee published their final Basel III framework A key objective in December of the 2017. revisions is to reduce excessive variability of risk-weighted assets (RWAs) and improve the comparability of banks’ capital ratios. Implementation dates range from 2022 to 2027 and transitional arrangements will be put in place regarding the new standards. Our initial analysis suggests that the impact of the new requirements will be broadly neutral for us from a capital perspective. Open Banking, General Data Protection Regulation and Payment Services Directive: PSD2 and Open Banking will have a material impact on the competitive environment in which we operate, with non-bank firms likely to enter the market by leveraging new payments regulation and data sharing protocols. Although this may intensify competition in the mortgage, credit card and savings markets over
> > > > Regulatory change The delivery of the following regulatory change programmes will be a core focus in 2018: > 36 I Virgin Money Group Annual Report 2017
Risk overview
Principal risks Key mitigating actions
Credit risk > credit risk is managed through risk > credit risk metrics are benchmarked Credit risk is the risk of loss resulting from a borrower or appetite and risk limits reflected in against competitors and industry counterparty failing to pay amounts due. approved credit policy; averages; We provide residential and buy-to-let mortgages and > a robust credit risk framework helps > customer behaviour is closely credit cards to customers across the UK. There is a ensure that the credit quality and monitored with timely action taken in risk that any adverse changes in the macro-economic composition of the portfolios remain response to any adverse change; and environment and/or the credit quality or behaviour within risk appetite limits. This is > credit risk arising from derivatives and of borrowers results in additional impairment losses, monitored and reported through from securities financing transactions thereby reducing profitability. governance committees regularly; is mitigated by collateralising > stress and scenario testing allows us to exposures on a daily basis.
Wholesale exposures arise through our liquid asset confirm portfolio resilience; portfolio and the use of derivative instruments to manage interest rate risk.
Market risk > market risk is managed through > stress and scenario testing focuses on Market risk is the risk that unfavourable market Board-approved risk appetite limits the impacts of differing interest rate movements lead to a reduction in earnings or value. and policies; environments. We do not trade or make markets. Interest rate risk > exposures are mitigated through the in the banking book is the only material category of use of natural offsets and derivatives; market risk. and
Operational risk > risk appetite is focused on maturing > we will continue to invest in and Operational risk is the risk of loss resulting from the control environment and therefore develop risk management frameworks, inadequate or failed internal processes, people and managing operational risk; systems and processes which systems or from external events, including legal risk. strengthen operational resilience; and > an ongoing programme of investment The management of third party relationships, cyber- in security infrastructure is in place to > we monitor external events impacting crime and information security remains a key focus for mitigate threats including cyber- other financial services companies to Virgin Money. attack; inform stress testing.
Conduct risk and compliance > compliance is maintained through > we continue to invest in and develop Conduct and compliance risk is defined as the risk that an effective and timely response risk management frameworks, our operating model, culture or actions result in unfair to changes in the regulatory systems and processes; and outcomes for customers. This could result in regulatory environment; > we focus on training to ensure sanction, material financial loss or reputational damage > the customer is placed at the heart colleague performance is aligned with if we fail to design and implement effective operational of decision-making by ensuring fair the regulatory responsibilities and to processes, systems and controls which maintain outcomes through comprehensive risk enable an awareness of good customer compliance with all applicable regulatory requirements. assessment and testing; outcomes. Strategic Report Financial Results Governance Risk Management Report Financial Statements Other Information
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We will continue to deliver will We aligned to asset quality strong the mortgage and of growth books. credit card ‘no loss’ will maintain our We wholesale the position for credit portfolio. to refine our will look We management rate risk interest to and approaches systems reflect the evolving regulatory landscape. in will continue to invest We cyber-crime defense, fraud laundering and anti-money infrastructure. will focus on our We Complaints Transformation project to continue to improve complaints volume of the point of resolved at first contact. Future focus focus Future
Virgin Money Group Annual Report Annual 2017 Group Money Virgin Impaired loans as a percentage increased but balances overall of level in 2017. remained at a low remains Wholesale credit quality debt with 100.0% of strong counterparties rated AA security above. or as a percentage Provisions impaired loans reduced of secured in reflecting growth with expired terms loans which do not require increased given the impairment provisions on collateral cover high level of these loans. Expired term loans months which are more than six an date have maturity their past cent. 25.8 per of LTV average the As a consequence of the increase in the size of balance sheet, Capital at Risk has increased in a positive rate rate scenario. The interest shock remains safely exposure risk within limits. The absolute amount of losses has developed in line but has with business growth, remained low. 1,000 accounts Complaints per at 4.91, compared remained low to 3.65 in 2016. Commentary 1.3% 97.0% AA or above 2017 2017 2016 2017 2017 2016 1.4% Debt securities % 100.0% unsecured balances Impaired as a % of total ( £3.4 3.65 0.3% £34.2 40.0% (£m) (£m) 4.91 £3.9 2017 2017 2016 2017 2017 2016 2017 2017 2016 0.4% 2017 2017 2016 2017 2017 2016 £52.2 33.5% secured balances Total complaints impaired balances Provisions as a % of (per 1,000 accounts) Total operating losses IRRBB – Capital at Risk Impaired as a % of total Key risk indicators indicators risk Key 38 I Virgin Money Group Annual Report 2017
Risk overview
Principal risks Key mitigating actions
Strategic and financial risk > Board focus is on ensuring alignment > active focus is on asset origination Strategic risk is the risk of significant loss or damage of business development and planning and portfolio management to manage arising from business decisions that impact the long- with risk appetite; margins and eliminate inappropriate term interests of stakeholders or from an inability to concentration risk; > we invest in processes, systems, adapt to external developments. recruitment and training to support > we will maintain pricing discipline Financial risk is focused primarily on concentration new business developments; across our product range, ensuring risk. Credit concentration risk is managed for retail and that risk is appropriately rewarded > we use robust risk and project wholesale credit exposures at portfolio, product and within our Board approved risk management disciplines to ensure counterparty levels. appetite; and that implementation is delivered Increased competition in our key lending markets safely; > regular validation and review of is leading to a reduction in asset spreads, creating models is performed. > we continually monitor customer additional financial risk. There is also the potential for behaviour metrics to identify adverse increased competition in the deposit taking market as trends; Bank of England funding schemes come to an end. Financial performance can be impacted by adverse changes in customer behaviour.
Funding and liquidity risk > Board-approved risk appetite and > a prudent mix of funding sources is Liquidity risk represents the inability to accommodate funding and liquidity policies define a maintained with a maturity profile set liability maturities and withdrawals, fund asset growth, limit structure; in risk appetite and policy limits; and and otherwise meet contractual obligations to make > liquid resources are maintained in > stress and scenario testing considers payments as they fall due. adequate quantity and quality to meet threats to funding plans and changes Funding risk represents the inability to raise and stressed outflows; in consumer behaviour. maintain sufficient funding in quality and quantity to support the delivery of the business plan.
Capital risk > Board-approved risk appetite ensures > capital procedures are subject to Capital risk is defined as the risk that we have a sub- we are holding sufficient capital within independent oversight; and optimal amount or quality of capital or that capital is regulatory requirements; > stress and scenario testing assesses deployed inefficiently across the Group. > the capital management policy sets capital adequacy under a range of out minimum standards for the severe market wide stress scenarios management of capital; and idiosyncratic stress events. Strategic Report Financial Results Governance Risk Management Report Financial Statements Other Information
39
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wholesale
wider
Focus will be on the Focus the digital development of and SME propositions, bank in addition to the ongoing development of propositions and customer digital capability. will continue to improve We and balance sheet efficiency resilience through measured diversification of the funding and building of SME deposit base. will continue to maintain a We with capital base high-quality regulatory of ratios in excess requirements. Future focus focus Future
year.
we seek to we seek
Virgin Money Group Annual Report Annual 2017 Group Money Virgin The development of the digital The development of and SME propositions bank services we provide will ensure that meet the future needs of diversify and further customers business and funding our franchises. manage to In order concentration risk in the areas spread the risk operate. This is we which in done through the controlled and LTVs management of strict the implementation of limits to minimise counterparty exposures. wholesale industry pricing discipline and Our of the cost management of funds enabled us to mitigate as on asset spreads, pressure the Banking NIM reduced to 172 basis points compared to 175 the prior basis points for Improved diversity of funding of diversity Improved has been achieved through our bonds as a covered registration entrance into the and our issuer, SME market. total capital and leverage Our with remained in line ratios have of well in excess expectation and requirements. regulatory Commentary 2016 15.2% 20.4% 4.4% accounts Customer Wholesale – TFS Wholesale – Other Total equity London Greater South East Scotland West South Regions Other ion tration 81% 28% 25% 2017 13.8% 18.1% 3.9% 5%
2016 2016 6% Funding mix 10% 8% 4% 33% Funding mix 2015 mix Funding gage concen Mortgage ion tration 76% 28% 25% 1.75% 4%
2017 2017 6% Funding mix 10% Banking NIM 8% 2017 2017 2016 1.72% 33% 10% Capital metrics CET1 Total capital ratio Leverage ratio gage concen Mortgage Key risk indicators indicators risk Key Funding mix 2016 mix Funding 40 I Virgin Money Group Annual Report 2017
Financial results
41 Summary of Group results 52 Business line results
Daniel Wanjiru KEN, with Kenenisa Bekele ETH and Bedan Karoki Muchiri KEN stand on the podium after the Elite Men’s Race. Photo: Virgin Money London Marathon Virgin Money Group Annual Report 2017 I 41 Strategic Report
Summary of Group results Financial Results
Our 2017 financial performance demonstrated continued Our operating platforms continued to support increasing progression across the three pillars of our strategy – Growth, scale of customer activity which, in turn, enhanced Group Quality and Returns: operational leverage. Underlying income growth of 13.5 > Growth – our market share of new lending continued to per cent significantly exceeded the 3.7 per cent growth in outstrip our share of stock resulting in continued growth in underlying costs, resulting in favourable JAWS of 9.8 per cent. balances, with loans and advances to customers increasing This continued improvement in operational leverage also by 13.5 per cent. This growth was funded predominantly by reflected our disciplined cost management and helped to the continued strength of the retail deposit franchise with create the capacity for increased investment in the business. customer deposits growing 9.6 per cent; Total investment in the core business was £52.8 million, > Quality – we maintained a disciplined approach to managing of which £41.8 million was capital expenditure. A further balance sheet growth with consistently high underwriting £38.3 million of capital expenditure was invested in the Governance standards leading to our low and stable cost of risk. Growth development of our new digital banking platform. in retail deposits was supported by further diversification of The quality of our lending continued to be underpinned by the our long-term wholesale funding, including additional RMBS consistent application of our risk appetite. This was reflected and drawings from the Term Funding Scheme (TFS). Capital in a cost of risk of 13 basis points which was in line with the resources grew through retained earnings and enabled us to prior year, despite a slightly greater proportion of credit card absorb additional investment in the build of our new digital balances. Whilst our low cost of risk benefits in part from bank; and the benign economic environment in the UK, it undoubtedly reflects the consistent application of our risk appetite and > Returns – higher balances drove income growth which, Financial Statements Risk Management Report combined with disciplined cost control, resulted in strong our disciplined approach to credit risk management across operational leverage. As a consequence our cost:income both our mortgage and credit card portfolios. The application ratio improved by 4.9 percentage points to 52.3 per cent of strict affordability requirements, robust credit decisioning for the year. Combined with our growth and low cost of risk, and prudent underwriting standards across our portfolios this resulted in a 28.1 per cent increase in underlying profit ensured that asset quality performance was ahead of our before tax with return on tangible equity (RoTE) increasing expectations. Balance growth has therefore been achieved to 14.0 per cent, compared to 12.4 per cent in the prior year. without any deterioration in the quality of new lending or Statutory profit after tax was £192.1 million, a 37.1 per cent the credit characteristics of the portfolios as a whole. Across increase on 2016. both portfolios all key credit metrics remain strong and this is reflected in low arrears experience. Gross mortgage lending of £8.4 billion was combined with strong retention performance to deliver mortgage balances Leverage and total capital ratios remained above regulatory of £33.7 billion at year end. Lending was carefully managed requirements with higher retained earnings supporting to optimise returns in an increasingly competitive mortgage lending growth and investment. The Common Equity Tier market. New business mortgage spreads were 19 basis points 1 (CET1) ratio remained well above our internal minimum lower than 2016 at 168 basis points. required CET1 ratio of 12.0 per cent at 13.8 per cent, with average mortgage risk weight density at 17.2 per Credit card balances increased by 23.6 per cent to cent. The liquidity and funding profile benefitted from £3.0 billion. This was in line with our expected growth and another successful issuance from our established Gosforth continued to demonstrate the strength of the franchise. We Residential Mortgage Backed Security (RMBS) programme continued to closely monitor the performance of our credit and we continued to access the TFS. Additionally, we have card book, with the latest observed customer behaviour received approval for a regulated covered bonds programme, reflected in the assumptions underlying the effective interest and expect our inaugural issuance to follow in 2018. rate (EIR) accounting. Our commercial agility during a year which saw strong Other information The growth in mortgage and credit card balances was funded competition on both sides of the balance sheet allowed us to predominantly through growth in deposits as our retail manage asset pricing and the cost of funds, which reduced savings franchise performed well, with balances reaching to 59 basis points (2016: 80 basis points). This resulted in £30.8 billion at year end. a Banking NIM of 172 basis points compared to 175 basis points for the prior year, in line with our expectations. 42 I Virgin Money Group Annual Report 2017
Financial results
Summary of Group results
The combination of strong lending growth, improved Our effective tax rate in 2017 was 26.8 per cent. The overall operational leverage and our low cost of risk delivered a tax rate for UK banks increased by 8 percentage points in 2016 28.1 per cent increase in underlying profit before tax, to as a result of the bank tax surcharge, adding £18.9 million £273.3 million. to the Group’s tax charge in 2017. The Group recognised a As a consequence of this continued progression, measures corporation tax charge of £70.5 million for the year. Statutory of shareholder returns were materially improved. Return on profit after tax was therefore £192.1 million, a 37.1 per cent tangible equity increased to 14.0 per cent and underlying increase on 2016. After distributions to AT1 holders, the profit basic earnings per share rose by 21.7 per cent to 39.8 pence. attributable to equity shareholders increased by 28.7 per cent Unburdened by legacy issues, growth in underlying profit to £167.3 million. before tax flowed to statutory profit before tax, which As a result of this strong financial performance, the Board has increased by 35.1 per cent to £262.6 million. recommended a final dividend that takes the total dividend in 2017 to 6.0 pence per ordinary share, an increase of 17.6 per cent compared to 2016.
Summary income statement 2017 2016 £m £m Change Net interest income 594.6 519.0 14.6% Other income 71.4 67.9 5.2% Total income 666.0 586.9 13.5% Costs (348.5) (336.0) 3.7% Impairment (44.2) (37.6) 17.6% Underlying profit before tax 273.3 213.3 28.1% Reconciling items between underlying and statutory profit before tax (see page 48) (10.7) (18.9) (43.4)% Statutory profit before tax 262.6 194.4 35.1% Taxation (70.5) (54.3) 29.8% Statutory profit after tax 192.1 140.1 37.1% Distributions to Additional Tier 1 security holders (net of tax) (24.8) (10.1) 145.5% Profit attributable to equity shareholders 167.3 130.0 28.7% Basic earnings per share – statutory (pence) 37.8 29.4 28.6%
666.0 273.3 586.9 523.5 213.3 438.1 365.1 160.7
104.7
43.6
Underlying total income (£m) Underlying proÿt before tax (£m) Virgin Money Group Annual Report 2017 I 43 Strategic Report Financial Results
Consolidated balance sheet 2017 2016 £m £m Change Assets Cash and balances at central banks 2,579.0 786.3 228.0% Loans and receivables 37,099.9 33,003.4 12.4% Available-for-sale financial assets 1,051.8 858.8 22.5% Other 377.1 407.1 (7.4)% Total assets 41,107.8 35,055.6 17.3% Governance Liabilities and equity Deposits from banks 5,379.0 2,132.5 152.2% Customer deposits 30,808.4 28,106.3 9.6% Debt securities in issue 2,736.9 2,600.0 5.3% Other 358.6 546.3 (34.4)% Total liabilities 39,282.9 33,385.1 17.7% Total equity 1,824.9 1,670.5 9.2% ikMngmn eotFinancial Statements Risk Management Report Total liabilities and equity 41,107.8 35,055.6 17.3%
Key metrics 2017 2016 Change Banking net interest margin % 1.72 1.75 (3)bps Net interest margin % 1.57 1.60 (3)bps Cost:income ratio % 52.3 57.2 (4.9)pp Cost of risk % 0.13 0.13 – Statutory basic earnings per share p 37.8 29.4 8.4 pence Tangible net asset value per share £ 2.97 2.73 24 pence Total Capital Ratio % 18.1 20.4 (2.3)pp Common Equity Tier 1 ratio % 13.8 15.2 (1.4)pp Leverage ratio % 3.9 4.4 (0.5)pp Return on tangible equity % 14.0 12.4 1.6pp
Key ratios are presented on an underlying basis except where stated. Definitions, including bases of calculation, are set out on page 262. Other information 44 I Virgin Money Group Annual Report 2017
Financial results
Summary of Group results
39.8 36.7 32.4 32.7 27.1 26.8 23.1 20.3 18.5
5.6
Loans and advances to customers (£bn) Underlying basic earnings per share (pence)
Balance sheet growth At 31 Dec At 31 Dec 2017 2016 £m £m Change Loans and advances to customers 36,740.2 32,367.1 13.5% Customer deposits 30,808.4 28,106.3 9.6% Wholesale funding (including government funding) 8,102.9 4,718.0 71.7% Wholesale funding <1 year maturity 855.0 575.0 48.7% Loan-to-deposit ratio 119.1% 114.5% 4.6pp High Quality Liquid Assets1 5,264.4 4,222.6 24.7%
1 These include Funding for Lending Scheme drawings of £1.9 billion (2016: £2.7 billion) which are held off balance sheet but are available for repo and hence count towards liquidity resources. The continuing strength of our lending franchise 2017 we received authorisation from the FCA for a regulated delivered 13.5 per cent growth in loans and advances to covered bonds programme, and expect that our inaugural customers in 2017. issuance will take place this year. We also expect to access This lending was funded by continued growth in our retail RMBS markets again during 2018. and wholesale funding franchises, as well as further drawings As we work towards the full implementation of minimum from the TFS. Total customer deposits grew by 9.6 per cent requirements for own funds and eligible liabilities (MREL) on to £30.8 billion at 31 December 2017, in excess of market 1 January 2022, during 2018 we will issue further unsecured growth of 3.5 per cent. We repriced four tranches of existing funding through our established Global Medium Term Note deposits of approximately £15 billion during 2017, and all were programme. The Bank of England provided MREL guidance, completed with lower than expected attrition. including transitional arrangements, in late 2016. This set In September 2017 we completed a successful issuance of an interim MREL requirement of 18 per cent of risk-weighted RMBS through our established ‘Gosforth’ franchise. This assets from 1 January 2020 until 31 December 2021. The included dollar and sterling tranches and raised sterling BoE will advise the Group on its ultimate MREL requirement equivalent funding of approximately £750 million. The in 2020. We therefore expect to issue further senior debt issuance was significantly oversubscribed, delivering long- gradually over the next four years to ensure compliance with dated term funding whilst also diversifying our investor MREL requirements. base in the US. The balance sheet structure is managed within a clearly We will continue to diversify and build out our funding sources defined risk appetite. The loan-to-deposit ratio increased to in the coming year in line with the long term aim of wholesale 119.1 per cent at the end of 2017 from 114.5 per cent at the funding providing up to 20 per cent of total funding. In July end of 2016, in line with guidance of towards 120 per cent while we are participating in the TFS. Virgin Money Group Annual Report 2017 I 45 Strategic Report Financial Results
We continued to make use of the TFS in 2017, with total The Group’s liquidity position remained strong throughout drawings at 31 December 2017 of £4.2 billion. The scheme the period, with high quality liquid assets at £5.3 billion at provides the Group with a cost effective source of funding, 31 December 2017. This reflects an increase in cash and supporting lending growth and further strengthening our balances held at the central bank. The Group held increased liquidity position. levels of liquidity at 31 December 2017, reflected in an increase in balances held at the central bank in part due to the 2.9 (0.7) repayment of £650.2 million of Funding for Lending Scheme 4.2 (FLS) drawings which have been replaced by on balance sheet liquidity. As a result our liquidity coverage ratio (LCR) of 203 per cent was significantly above the regulatory minimum of 27.1 90 per cent. From 1 January 2018 the regulatory minimum 1.3 Governance has increased to 100 per cent. The high quality liquid asset 2.7 portfolio represented more than six times our wholesale funding with a maturity of less than one year. 2.0
.PWFNFOUJO5'4 .PWFNFOUJO'-4 Q 5'4ESBXJOHT bCO Q '-4ESBXJOHT bCO
Income benefitted from growth in asset balances Financial Statements Risk Management Report 2017 2016 £m £m Change Net interest income 594.6 519.0 14.6% Other income 71.4 67.9 5.2% Total income 666.0 586.9 13.5% Banking net interest margin 1.72% 1.75% (3)bps Average interest earning banking assets 34,536 29,691 16.3% Net interest margin 1.57% 1.60% (3)bps Average interest earning assets 37,991 32,521 16.8%
Net interest income increased by 14.6 per cent to £594.6 million, driven by balance growth across the mortgage and credit card books and a Banking net interest margin (NIM) of 172 basis points. Mortgage spreads were at lower levels than 2016, driven by competition as well as lower funding costs, in part as a result of the TFS. As a result, new mortgage lending in 2017 was priced at an average spread of 168 basis points, compared to 187 basis points in 2016. However, further optimisation of our funding base continued to support Banking NIM in a competitive environment. We successfully repriced four tranches of deposits and this, along with drawings from the TFS, contributed to a reduction in the cost of funds from 80 basis points in 2016 to 59 basis points in 2017. Taken together, these factors reduced Banking NIM to 172 basis points in 2017 from 175 basis points in 2016. Total NIM also reduced by 3 basis points to 157 basis points. Other information Credit card income has benefitted from further growth in the cards book, resulting in an increasing contribution to total net interest income (NII) in the year. Credit card NII in the year includes an accrual of £78.0 million (2016: £61.5 million) arising from the credit card effective interest rate (EIR) method. Credit card EIR is calculated over the expected card life, up to a maximum of seven years. Historical evidence and data continue to support our modelling assumptions and the use of a seven year modelling life. 46 I Virgin Money Group Annual Report 2017
Financial results
Summary of Group results
Other income increased by 5.2 per cent to £71.4 million reflecting stable income from our Investments and Pensions business together with small increases in credit card interchange and foreign exchange income and sales of investment assets. Other income included a gain of £6.1 million from the sale of the investment in Vocalink in the first half of 2017. Excluding the gain from the sale of Vocalink and the gain of £5.3 million on the investment held in Visa Europe during the first half of 2016, other income increased by 4.3 per cent. Costs remained tightly controlled 2017 2016 £m £m Change Costs 348.5 336.0 3.7% Cost:income ratio 52.3% 57.2% (4.9)pp
Cost growth in 2017 was constrained to just 3.7 per cent. Set against income growth of 13.5 per cent, this produced positive JAWS of 9.8 per cent and reduced the cost:income ratio by 4.9 percentage points to 52.3 per cent. This performance meant that we successfully achieved our stated target of exiting 2017 with a cost:income ratio of less than 50 per cent, delivering a ratio of 49.4 per cent for the fourth quarter. This controlled growth in costs was achieved despite higher depreciation and amortisation during the year. Efficiency improvements continued across the business with our ongoing programme of operational effectiveness and the ability to leverage our central functions being key drivers. Our strong cost performance helped to create the capacity for increased investment in the business. Total investment in the core business was £52.8 million, of which £41.8 million was capital expenditure. A further £38.3 million of capital expenditure was invested in the development of our new digital banking platform. 700 Underlying 666.0 income (£m) 600 Underlying 586.9 costs (£m) 80.1% 500 72.5% 63.5% 400 57.2% 52.3% 300 336.0 348.5 200 100 0 Cost:income ratio Operating JAWS Virgin Money Group Annual Report 2017 I 47 Strategic Report Financial Results
Impairments reflected a resilient economy and rigorous credit risk management 2017 2016 £m £m Change Mortgages Impairment charge 2.2 2.8 (21.4)% Cost of risk 0.01% 0.01% – Credit Cards Impairment charge 42.0 34.8 20.7% Cost of risk 1.51% 1.70% (19)bps Governance Group Impairment charge 44.2 37.6 17.6% Cost of risk 0.13% 0.13% – Provisions as a % of arrears balances1 32.9% 29.4% 3.5pp Impaired loans as a % of loans and advances 0.5% 0.4% 0.1pp Provisions as a % of impaired loans 33.5% 40.0% (6.5)pp
1 Arrears are defined in the risk report on page 140. ikMngmn eotFinancial Statements Risk Management Report We maintained a low cost of risk in 2017 through our established risk appetite framework, ongoing focus on underwriting rigour and the origination of high credit quality customers and prime assets. The cost of risk for mortgages was flat between 2016 and 2017 at 0.01 per cent and the impairment charge reduced by £0.6 million compared to the prior year. This performance reflected the high quality of the mortgage portfolio combined with the benign economic environment, leading to a continuing low level of defaults. The percentage of mortgages over three months in arrears was 0.12 per cent at the end of 2017 (2016: 0.15 per cent). In credit cards, set against growth of 23.6 per cent in balances, the impairment charge for the portfolio increased by only 20.7 per cent to £42.0 million. The resulting cost of risk for credit cards decreased by 19 basis points to 1.51 per cent in 2017. This underlines the high credit quality of new and existing cards which continue to have a low rate of default. Performance of new cohorts of cards remained strong with all cohorts showing a cost of risk lower than or in line with previous vintages. When accounts under 18 months old are excluded the cost of risk remains low at 1.66 per cent. Provisions as a percentage of balances in arrears increased to 32.9 per cent (2016: 29.4 per cent) as we retained appropriate coverage of balances at risk of loss. Impaired loans as a percentage of loans and advances for the Group increased marginally to 0.5 per cent in 2017 compared to 0.4 per cent in 2016. This was due to an increase in secured balances with qualitative impairment indicators, such as interest only expired terms or fraud cases, which we prudently categorise as impaired regardless of arrears status or expected recoverable amount. Expired term loans which are more than six months past their maturity date have an average LTV of 25.8 per cent, and therefore do not require increased impairment provisions given the high level of collateral cover. The growth in these balances within the impaired loans category is therefore reflected in the reduced provision coverage of impaired loans. Further information on the performance of our loan portfolios is provided in the Risk Management Report, on pages 134 to 152. Other information 48 I Virgin Money Group Annual Report 2017
Financial results
Summary of Group results
Underlying profit before tax to statutory profit before tax reconciliation 2017 2016 £m £m Change Underlying profit before tax 273.3 213.3 28.1% IPO share based payments (0.9) (2.0) Strategic items (6.5) (2.4) Simplification costs – (5.6) Fair value losses on financial instruments (3.3) (8.9) Reconciling items between underlying and statutory profit before tax (10.7) (18.9) (43.4)% Statutory profit before tax 262.6 194.4 35.1%
The financial statements have been prepared in accordance > Simplification costs with International Financial Reporting Standards (IFRS). In 2016 we took the opportunity to focus on simplification Aspects of the results are adjusted for certain items, which are activity, including de-layering our organisation structure. listed below, to reflect how the Executive assesses the Group’s This led to one-off costs incurred in 2016 including those underlying performance without distortions caused by in relation to a number of senior leavers, which included items that are not reflective of the Group’s ongoing business accelerated share based payment charges. These were activities. These reconciling items were 43.4 per cent lower in not considered part of the underlying results and were not 2017, as the absence of simplification costs, lower fair value repeated in 2017. losses on financial instruments and a reduction in share based payments related to the IPO more than offset the increased > Fair value losses on financial instruments investment in strategic items. The following items have been Fair value gains and losses on financial instruments excluded from underlying profits: reflect the results of hedge accounting and the fair value > IPO share based payments movements on derivatives in economic hedges to the extent that they either do not meet the criteria for hedge These costs relate to share based payment charges accounting or give rise to hedge ineffectiveness. Where triggered by our successful IPO in 2014, which are these derivatives are held to maturity, fair value movements recognised over their vesting period. By their nature, these recorded in this heading represent timing differences that payments are not reflective of ongoing trading performance will reverse over their lives and therefore excluding these and are not, therefore, considered part of the underlying from underlying profit better represents the underlying results. 2017 is the last year in which such charges performance of the Group. Where derivatives are will be incurred. terminated prior to maturity, this may give rise to fair value > Strategic items movements that do not reverse. We incurred strategic investment costs of £6.5 million The reconciliations of the Group’s statutory and underlying in 2017, entirely due to the development of our digital results are reported above and in note 2 to the consolidated banking platform which is not, at this stage, considered financial statements. part of our underlying results. Included within this amount The Group uses a number of Alternative Performance is a non-cash impairment charge of £4.8 million in respect Measures (APMs), in addition to underlying profit, in the of previous software development on an earlier digital analysis and discussion of its financial performance and project which has been discontinued in light of the strategic financial position. APMs do not have standardised definitions decision taken in May 2017 to consolidate activities within and may not be directly comparable to measures defined the digital bank programme. within IFRS. A full list of APMs used by the Group, including their bases of calculation, are set out on page 262. Virgin Money Group Annual Report 2017 I 49 Strategic Report Financial Results
Continued strong progression in returns 2017 2016 Change Return on tangible equity % 14.0 12.4 1.6pp Return on assets % 0.46 0.44 2bp Tangible net asset value per share p 297 273 24p
The strength of income growth and improved operational leverage, combined with our asset quality, has driven material enhancement to returns in 2017. Return on tangible equity increased by 1.6 percentage points to 14.0 per cent in 2017, from the 12.4 per cent achieved in 2016.
At the same time, the return on assets grew by 2 basis points to 0.46 per cent in 2017, from 0.44 per cent in 2016. On a statutory Governance basis, return on assets increased to 0.47 per cent from 0.40 per cent in 2016. This statutory measure excludes AT1 coupons and benefitted from lower reconciling items in 2017. Tangible net asset value per share also increased, by 24 pence to 297 pence, as improving profitability flowed through to retained earnings.
297 14.0%
12.4% 273 Financial Statements Risk Management Report 10.9% 254
Return on tangible equity Tangible net asset value per share (pence) Other information 50 I Virgin Money Group Annual Report 2017
Financial results
Summary of Group results
Capital strength whilst investing in the future 2017 2016 Change Common Equity Tier 1 capital (CET1) £m 1,264.2 1,172.7 7.8% Risk-weighted assets (RWAs) £m 9,178.6 7,694.8 19.3% > of which mortgage credit risk RWAs £m 5,790.5 4,764.5 21.5% > of which credit card credit risk RWAs £m 2,282.9 1,847.4 23.6% > of which all other RWAs £m 1,105.2 1,082.9 2.1% Common Equity Tier 1 ratio % 13.8 15.2 (1.4)pp Tier 1 ratio % 18.0 20.2 (2.2)pp Total capital ratio % 18.1 20.4 (2.3)pp Leverage ratio % 3.9 4.4 (0.5)pp
During the year we generated capital, after distributions As a result of the above movements, the CET1 ratio reduced to AT1 holders and before investment and dividends, of to 13.8 per cent at 31 December 2017 compared with 15.2 £167.3 million, which was equivalent to 182 basis points of per cent at the end of 2016. This was in line with the expected CET1 capital. development of our business and is in excess of our internal This was used to invest in the business, provide dividends minimum CET1 ratio of 12 per cent. for shareholders and increase capital resources. The net The total capital ratio of 18.1 per cent also reduced in line with investment in intangible assets, including capital investment the movements described above, and remains significantly in in our digital banking platform, was £47.8 million. Accrued excess of our total regulatory requirements of 15.0 per cent: dividends for equity shareholders amounted to £26.5 million. £14.3 After further small balancing items, this resulted in an 18.1% increase in CET1 capital of £91.5 million which was in turn £384.1 used to support customer lending. £114.7 15.0% Lending growth resulted in a 19.3 per cent increase in RWAs to £524.3 £9.2 billion. In mortgages, growth in credit risk RWAs of 21.5 per cent was higher than balance growth of 13.2 per cent as £1,264.2 the average mortgage risk weight density, as a percentage of balance sheet assets, increased to 17.2 per cent from £734.3 16.0 per cent, in line with expectations. In credit cards, credit risk RWA growth was in line with asset growth as our credit card RWAs are calculated using the Resources Requirements standardised approach. Q$&5Q"5Q5JFS Q1JMMBSQ1JMMBS"Q$$P# Other RWAs increased by 2.1 per cent. This reflected growth in Capital Resources and Requirements – 31 Dec 2017 (£m) operational risk RWAs in line with the standardised approach, where the growth in average income over the past three The capital requirement of 15.0 per cent at 31 December 2017 years is recognised in a higher level of operational RWAs. comprised Pillar 1, Pillar 2A and the capital conservation This was largely offset by a reduction in exposure to higher buffer. At 31 December 2017, as per our Individual Capital risk-weighted instruments and counterparties in our liquid Guidance (ICG), the Basel I floor was our binding constraint asset portfolio. and equivalent to a Pillar 2A capital add-on requirement of 5.71 per cent. Any PRA buffer, if applicable, is a matter between the PRA and Virgin Money. The PRA buffer also takes account of the capital conservation buffer. Virgin Money Group Annual Report 2017 I 51 Strategic Report Financial Results
The leverage ratio was 3.9 per cent at the end of the year This impact would reduce the Group’s CET 1 ratio by compared to 4.4 per cent at the end of 2016. The reduction approximately 1 basis point as at 1 January 2018 taking reflected higher growth in leverage ratio eligible assets than into account the recently published capital transitional in capital resources. Growth in eligible assets was due to arrangements. Excluding the transitional arrangements the increased customer balances and higher levels of on balance reduction to the CET 1 ratio would be approximately 36 bps. sheet liquidity as FLS was repaid. These impacts remain within expectation and are included We manage our capital resources to support shareholder within the Group’s capital plans. We continue to refine, returns and ensure that the bank is well capitalised to meet monitor and validate certain elements of the impairment our current and future business plans and our assessment of models and related controls ahead of full reporting of IFRS 9 regulatory risks and requirements. impacts later in 2018. Dividend Conclusion Governance The strength of our profitability and our capital base 2017 represented a further year of significant financial continues to give the Board confidence to recommend the progress for Virgin Money. High-quality lending growth payment of a final dividend. In addition to the interim dividend combined with further operational leverage has driven for 2017 of 1.9 pence per ordinary share, paid to shareholders improved returns for our shareholders across RoTE, earnings in September 2017, the Board has recommended a final per share and tangible net asset value. This has been achieved dividend of 4.1 pence per ordinary share in respect of 2017 with no degradation of asset quality, further diversification of which will be paid, subject to approval at our AGM in May the funding base and with continued focus on the strength of the capital base and capital ratios.
2018. The total dividend per share for 2017 will therefore be Financial Statements Risk Management Report 6.0 pence, an increase of 17.6 per cent compared to 2016. Our As the business has become increasingly capital generative intention is to maintain a progressive approach to dividends we have been able to invest in the next stage of our strategic and to pay an interim and final dividend for 2018, subject development with our initiatives to develop the digital bank to performance. and our proposition for the SME market. IFRS 9 We are well placed for the transition to the new accounting requirements of IFRS 9. We estimate the transition to IFRS 9 will reduce shareholders’ equity by approximately £35 million after deferred tax as at 1 January 2018. The most significant impact on the Group arises from the changes to loan loss impairment with the introduction of an expected credit loss approach. Given the low LTV and high credit quality of the Peter Bole mortgage portfolio and high credit ratings of the wholesale Chief Financial Officer book, the main impact will arise from the Group’s credit 26 February 2018 card portfolio. Other information 52 I Virgin Money Group Annual Report 2017
Financial results
Business line results
Mortgages & Financial Central Savings Credit Cards Services Functions Group £m £m £m £m £m 2017 Net interest income 430.2 164.4 – – 594.6 Other income 3.1 19.4 37.2 11.7 71.4 Total income 433.3 183.8 37.2 11.7 666.0 Total costs (348.5) (348.5) Impairment charge (2.2) (42.0) – – (44.2) Net interest margin 1.35% 5.95% – – 1.57% Cost of risk 0.01% 1.51% – – 0.13% Key balance sheet items at 31 December 2017 Loans and advances to customers1 33,672.4 3,024.1 – – 36,696.5 Customer deposits 30,808.4 – – – 30,808.4 Total customer balances 64,480.8 3,024.1 – – 67,504.9 Risk-weighted assets 6,308.1 2,467.6 53.4 349.5 9,178.6
Mortgages & Financial Central Savings Credit Cards Services Functions Group £m £m £m £m £m 2016 Net interest income 383.0 136.0 – – 519.0 Other income 2.0 17.7 37.5 10.7 67.9 Total income 385.0 153.7 37.5 10.7 586.9 Total costs (336.0) (336.0) Impairment charge (2.8) (34.8) – – (37.6) Net interest margin 1.38% 6.69% – – 1.60% Cost of risk 0.01% 1.70% – – 0.13% Key balance sheet items at 31 December 2016 Loans and advances to customers1 29,740.8 2,447.1 – – 32,187.9 Customer deposits 28,106.3 – – – 28,106.3 Total customer balances 57,847.1 2,447.1 – – 60,294.2 Risk-weighted assets 5,204.5 2,012.3 50.4 427.6 7,694.8
1 Excluding fair value of portfolio hedging The Group allocates interest expense arising from retail and wholesale funding activities between the Mortgage and Savings and Credit cards business lines. Virgin Money Group Annual Report 2017 I 53 Strategic Report Financial Results
Mortgages and Savings Buy-to-let balances of £6.4 billion represented 18.9 per cent We provide mortgages, savings and current accounts to of the overall mortgage book at year end. The private rental almost 1.8 million customers. Mortgages are sold primarily sector remains a key component of meeting UK housing through our intermediary partners and retail deposits are demand and we retained a strong presence in the buy-to-let largely originated through our digital channel. Our Mortgages market, particularly in the remortgaging segment. and Savings business line is an important revenue driver for Completion spreads across the market trended downwards in the Group, contributing 65.1 per cent of total income in 2017. 2017 as a result of competitive pressures. Both incumbents Mortgage Strategy and new entrants looked to build market share and the market Our approach to mortgages is very straightforward. We was impacted by lower funding costs, in part as a result of the offer a wide range of mortgage products to prime credit TFS. Our dynamic approach to adjusting pricing in response to quality customers. Distribution is principally through our competitor movements, expanded reach into new customer Governance intermediary partners, supplemented by direct distribution segments, and strong intermediary relationships enabled us and supported by excellent service. to offset these pressures to a degree. We ended 2017 with a completion spread of 168 basis points, down from 187 basis We have continued to develop our mortgage proposition to points in 2016. broaden our presence across segments of the market where we are under-represented. These have been delivered within Geographically our lending is broadly consistent with our existing risk appetite. the general distribution of balances across the UK. We retain a consistent presence in more affluent areas such We continued to strengthen our intermediary proposition to as London and the South East where arrears are lower and enrich existing intermediary relationships, which have been a Financial Statements Risk Management Report our underwriting ensures a lower loan-to-value of new driver of value for us during 2017. Additionally, we continue to business. This affords us protection should house prices fall invest in the retention of our existing customers. in the future. Key developments – Mortgages We remain committed to helping customers to achieve We delivered gross lending of £8.4 billion in the year to their home ownership aspirations and continue to develop 31 December 2017. This was achieved with a consistent risk our mortgage franchise to this end. We launched a Shared profile, with the average loan-to-value of new lending stable Ownership proposition to enhance customers’ options and at 68 per cent. we became the first mainstream bank to enter the Custom In an increasingly competitive environment and with the gross Build sector. The number of customers using Virgin Money lending market growing by 4 per cent to £257 billion, our to buy a New Build property increased by 41 per cent year on performance was in line with the prior year and represented a year. These developments enabled us to increase the value 3.3 per cent market share of gross lending. of gross lending to First Time Buyers by 20 per cent. Lending Mortgage retention rates at product maturity remained at a loan-to-value over 90 per cent remained low however, strong with 72 per cent of customers with maturing fixed rate and represented under 4 per cent of our new business loans. or tracker products being successfully retained during 2017, Customer demographics were stable and performance compared with 68 per cent in 2016. remained robust. The combined effect of new business and retention We continued to deliver enhancements for mortgage brokers. performance resulted in net lending of £3.9 billion. This Our partnerships with key national intermediaries continued represented an 8.9 per cent market share of net lending. This to develop as we strengthened the intermediary proposition steady progression continued to bring our share of stock by expanding access to our New Build offering and through towards our share of flow, within a stable credit risk appetite. entering new market segments such as Shared Ownership. In 2017 our share of stock increased to 2.45 per cent from These initiatives, together with our strong service levels, were 2.23 per cent in 2016 as mortgage balances increased by 13.2 recognised by our partners as our intermediary NPS increased Other information per cent to £33.7 billion in 2017. to +61 from +55 in 2016. Prime residential balances grew by 12.5 per cent to Thanks to developments in our innovative Mortgage Lab, we £27.3 billion, representing 81.1 per cent of the overall also made progress on our proposition for customers who mortgage book and 81.7 per cent of new lending in 2017. wish to use our direct channel. As a result, the proportion of new mortgage applications from direct customers increased 54 I Virgin Money Group Annual Report 2017
Financial results
Business line results
to 12 per cent in 2017 from 10 per cent in 2016, and exceeded opening run rate at the level experienced through 2016, £1 billion for the first time. opening 12,000 new accounts in 2017. The quality of our mortgage franchise was recognised with We continue to focus on providing best in class customer several industry awards over the course of the year: Legal & service. Improvements to the customer proposition and General Best Lender for Partnership (for the third consecutive journey are reflected in our strong retention rates and year); Yourmoney Best Online Mortgage Provider; Mortgage continued growth in customer advocacy, with Savings NPS Strategy Awards Best Mortgage Lender and Sesame Bankhall increasing to +37 in 2017 from +16 in 2016. Group Best Innovative Lender. Ongoing active management of retail funding costs in the Savings Strategy context of competitive market conditions contributed to a We offer customers a range of instant access and fixed term reduction in the total cost of funds from 80 basis points in savings products, also making these available as ISAs. We also 2016 to 59 basis points in 2017. offer a basic bank account. Savings products are sold primarily 2017 financial highlights – Mortgages and Savings through our digital channels supplemented by our Stores > mortgage balances grew by 13.2 per cent to £33.7 billion, and contact centres. We attract and retain customers with driven by gross lending of £8.4 billion, and strong customer enduring, good value offers and excellent service. retention. In a competitive marketplace, spreads on new Key developments – Savings business reduced 19 basis points to 168 basis points; We opened more than 370,000 new savings accounts in the > deposit balances grew by 9.6 per cent to £30.8 billion. With year. At the end of 2017 we had more than 1.3 million savings TFS helping to reduce market funding costs, our active customers and balances had grown to £30.8 billion, up from management of pricing enabled us to reduce spreads and £28.1 billion at 31 December 2016. partially offset downward pressure on asset pricing; This balance growth of 9.6 per cent compared to market > NIM for the full year 2017 was 1.35 per cent in the mortgage growth of 3.5 per cent over the course of 2017. Our market and savings business. The 3 basis point reduction in NIM share of savings stock was 1.7 per cent at 31 December 2017. relative to 2016 reflects the dilutive effect of new lending Performance was underpinned by strong customer retention. and competitive market conditions, partially mitigated by our We retained 89 per cent of customers with maturing fixed rate active management of pricing and mix in both the mortgage balances and successfully repriced £15 billion of funds on our and savings markets; existing book across four phases of repricing. Attrition rates > net interest income increased by 12.3 per cent to £430.2 on each reprice were consistently better than expectations. million, driven by growth in mortgage balances. Combined Cash ISA performance was particularly strong in 2017 with a £1.1 million increase in other income, total income in with balances increasing by 27 per cent compared to a flat this business line rose by 12.5 per cent to £433.3 million; market, reflecting the strong appeal of our proposition to ISA > the high quality of our mortgage business continued to be customers. We had a market share of Cash ISA balances of 6.1 reflected in the cost of risk which remained stable at 1 basis per cent at the end of December 2017, up from 4.8 per cent at point for the year. Our already low arrears levels reduced the end of 2016. further in 2017. The percentage of loans over three months We continued to develop new propositions to broaden in arrears was 0.12 per cent at the end of 2017, compared to our access to savings customers with differing needs. Our 0.15 per cent at the end of 2016; regular saver product helps attract customers who are > at £2.2 million, the impairment charge in 2017 was below new to saving and had attracted over 45,000 customers by the £2.8 million incurred in 2016, reflecting our strong credit the end of 2017. We were also pleased to grow our savings management and resulting high-quality mortgage book, as products partnership with Manchester United to reach 10,000 well as benign economic conditions; and customer accounts during the year. > risk-weighted assets in this business line increased by 21.2 Our Essential Current Account continues to attract customers per cent to £6.3 billion, reflecting lending growth with new looking for a straightforward transparent product, and is business coming onto the book at risk weights higher than endorsed as one of the best basic bank accounts in the market more seasoned stock. by Money Saving Expert. We have maintained our account Virgin Money Group Annual Report 2017 I 55 Strategic Report Financial Results
Performance summary – Mortgages and Savings 2017 2016 £m £m Change Net interest income 430.2 383.0 12.3% Other income 3.1 2.0 55.0% Total underlying income 433.3 385.0 12.5% Impairment charge (2.2) (2.8) (21.4)% Mortgages and savings net interest margin 1.35% 1.38% (3)bps Cost of risk 0.01% 0.01% – Governance 2017 2016 £m £m Change Key balance sheet items at 31 December Loans and advances to customers 33,672.4 29,740.8 13.2% – of which prime residential 27,306.4 24,273.6 12.5% – of which buy-to-let 6,366.0 5,467.2 16.4%
Customer deposits 30,808.4 28,106.3 9.6% Financial Statements Risk Management Report Total customer balances 64,480.8 57,847.1 11.5% Risk-weighted assets 6,308.1 5,204.5 21.2% Other information 56 I Virgin Money Group Annual Report 2017
Financial results
Business line results
Credit Cards We provide credit card products, predominantly online, Our customer indebtedness scores remained significantly to 1.2 million customers. Our portfolio is a mix of balance below the market average, driven by strong affordability transfer and retail credit cards, and our offering continues to established at the point of underwriting. The profile of newly develop with the launch of our Virgin Atlantic Airways affinity acquired customers remained broadly stable following products in the first half of 2018. Our credit card business additional tightening of criteria for all customers. contributed 27.6 per cent of total income in 2017. In 2017 over 98 per cent of new balance transfer customers Strategy were booked at an expected loss rate of less than 1 per cent. Our Credit Card business has continued to build on the This compared with 74 per cent of new balance transfer foundations laid by the successful migration of the book customers booked at an expected loss rate of less than 1 per purchased from MBNA onto our own platform in early 2015. cent in the overall market. We do not book customers outside The functionality of our credit card platform has allowed us our credit risk appetite, and do not downsell to applicants who to continue to grow the business through simple, transparent do not pass our initial credit score assessment. products offered to high credit quality applicants, supported This all ensured that our early arrears continued to by strong risk management and analytical capability. outperform the industry, as did portfolio arrears levels. The product portfolio has been expanded to cater for different We maintained our in-depth monthly review of customer customer needs in the balance transfer and retail card spending, borrowing and repayment behaviour. This segments. We have achieved this with a range of products demonstrated stable usage and a highly consistent that focus on core customer needs: debt consolidation, pattern of activity. borrowing and everyday spending. During the year, the first cohorts of business underwritten Key developments on our own platform in 2015 reached the end of promotional Balances grew by 23.6 per cent during 2017 as we achieved terms. These cohorts represented a relatively low volume our target of £3.0 billion of balances by the end of 2017, with a of balances. In 2018 greater volumes of balances will reach stable customer profile and improving credit quality. the end of promotional terms. In line with this, we will see a In 2017 we launched new customer initiatives such as ‘Virgin natural increase in balance attrition which will result in lower Money Back’ offering cashback on purchases, together with levels of overall portfolio balance growth. Our co-branded promotions to encourage contactless transactions. These partnership with Virgin Atlantic Airways (VAA) will help us supported an 8 per cent increase in average retail spend per to diversify the mix in our portfolio further with a higher active account. These initiatives, together with improvements proportion of borrowing from retail spend and reward based in customer service resulting from an upgrade to our cards complementing our balance transfer offers. The first online service platform, led to credit card NPS improving to VAA products will be launched in the first half of 2018. +46 (2016: +42). The strength of our customer proposition and experience was We opened close to 300,000 customer accounts during recognised by winning the British Bank Awards Best Credit 2017, in line with the prior year. We continued to move the Card Provider and the Your Money Awards Best Online Credit focus of customer acquisition towards retail-led cards, Card Provider for 2017. which represented over 40 per cent of new accounts in 2017 compared to 30 per cent in 2016. As a result of the ongoing diversification of our portfolio, retail spend on our cards was 41 per cent higher than in 2016. Virgin Money Group Annual Report 2017 I 57 Strategic Report Financial Results
2017 financial highlights – Credit Cards > other income increased by 9.6 per cent. This increase was > credit card balances increased by 23.6 per cent to £3.0 billion driven by higher interchange and foreign exchange income at year end; reflecting an increase in retail volumes and a higher mix of > net interest income grew by 20.9 per cent to £164.4 million retail accounts; reflecting growth in balances; > as a result of the above factors, total income increased by > the performance of the book continued to be closely 19.6 per cent; monitored with the latest observed customer behaviour > the impairment charge for credit cards increased by 20.7 per reflected in the assumptions underlying our effective interest cent to £42.0 million reflecting balance growth. The high rate (EIR) accounting. Historical evidence and data continue to credit quality of new and existing cohorts, which continue to support our use of a seven year modelling life; have a low rate of default, meant the cost of risk for credit Governance > net interest margin decreased by 74 basis points to 5.95 per cards reduced by 19 basis points to 1.51 per cent in 2017, from cent reflecting book growth and the relatively lower yield on 1.70 per cent in 2016; and more recent cohorts of lending; > risk-weighted assets in the business line increased by 22.6 per cent from 2016, driven by the growth in balances. Performance summary – Credit Cards 2017 2016 £m £m Change Net interest income 164.4 136.0 20.9% ikMngmn eotFinancial Statements Risk Management Report Other income 19.4 17.7 9.6% Total income 183.8 153.7 19.6% Impairment charge (42.0) (34.8) 20.7% Credit cards net interest margin 5.95% 6.69% (74)bps Cost of risk 1.51% 1.70% (19)bps
2017 2016 £m £m Change Key balance sheet items at 31 December Loans and advances to customers 3,024.1 2,447.1 23.6% Total customer balances 3,024.1 2,447.1 23.6% Risk-weighted assets 2,467.6 2,012.3 22.6% Other information 58 I Virgin Money Group Annual Report 2017
Financial results
Business line results
Financial Services The Financial Services business line offers customers transparent quotation process, and has already delivered investment, insurance and currency products and services. We 4,000 policy sales. work in partnership with a number of specialist organisations The travel insurance market continues to be competitive. In to deliver these products, which generate attractive returns order to adapt to this environment we focused on attracting and consume low levels of capital. This business line higher volumes of direct customers. We achieved this by contributed 5.6 per cent of total income in 2017. enhancing the customer journey, including a new ‘quick quote’ Strategy facility. This narrower focus resulted in lower volumes overall Our Financial Services strategy is based on a partnership but increased income per policy. We also saw the NPS of Travel model. We seek partners who share our commitment to Insurance customers improve to +38 from +35 in 2016. straightforward, transparent and good value customer 2017 financial highlights – Financial Services propositions. We leverage their capabilities with our brand > income in the Financial Services business line continued to be and marketing expertise to access profitable sectors and driven by our investment funds business, where income was up capital-light product lines, whilst limiting our exposure to 0.9 per cent compared with 2016; financial risk. > funds under management stood at £3.7 billion at Key developments 31 December 2017, an increase of 9.6 per cent from 2016 The investment business performed well in 2017 as inflows driven by increases in the FTSE, and sales of stocks and shares increased by 27 per cent compared to 2016. Stocks and Shares ISAs. The Group mitigated the risk associated with stock ISA sales and transfers were a particular highlight, with annual market movements and their impact on earnings through the growth of 40 per cent and 160 per cent respectively. These use of a FTSE hedge, and as a consequence income growth did were driven by the increased ISA threshold in combination not fully benefit from the rise in the FTSE; with strong Virgin Atlantic Airways partnership sales and continued improvements to the customer journey. > insurance and other income in 2017 decreased by 10.3 per cent, reflecting continued competitive pressure in the travel In the insurance business, we successfully re-launched insurance market; and our life insurance product with our new partner BGL. This features a straightforward proposition with a simple and > as a result, total income from the Financial Services business fell by 0.8 per cent year-on-year.
Performance summary – Financial Services 2017 2016 £m £m Change Investments and pensions 32.0 31.7 0.9% Insurance and other 5.2 5.8 (10.3%) Total income 37.2 37.5 (0.8%)
2017 2016 £m £m Change Key balance sheet items at 31 December Risk-weighted assets 53.4 50.4 6.0% Virgin Money Group Annual Report 2017 I 59 Strategic Report Financial Results
Central Functions Our Central Functions provide shared support services to 2017 financial highlights – Central Functions each of our business lines. These services include Information > interest income and expense incurred from Treasury funding Technology and Property, together with functions such as and liquidity operations is allocated to the Mortgage, Savings Risk, Finance, Treasury, Human Resources and the Group’s and Credit Cards businesses; Executive. It is not our policy to allocate operating costs to > other income is primarily driven by gains from the sale of each business line, as we manage operating costs across the available-for-sale assets and debt securities. In 2017 this business as a whole. This has the benefit of more effective included a gain of £6.1 million arising from the sale of our cost management. investment in Vocalink. 2016 other income included a gain of This part of our business contributed 1.8 per cent of total £5.3 million on the investment held in Visa Europe; Governance income in 2017 from the sale of available-for-sale assets and > operating costs remained tightly controlled with continuous debt securities by our Treasury function. improvement across the organisation. In our savings operation Key developments the implementation of additional automation led to a 21 per Management of operating expenses is a key discipline for cent improvement in new accounts opened per FTE. the business. We have continued to invest in our people > an £8.5 million increase in depreciation and amortisation and in developing the long term future of the bank through arose from capital expenditure in prior years, as we continued digital investment whilst stringently managing costs through to invest in the future of the bank; and further simplification and efficiency activity. This approach > an 18.3 per cent reduction in risk-weighted assets primarily has driven continued improvements in operational leverage, Financial Statements Risk Management Report delivering a Cost:Income ratio of less than 50 per cent for the due to the reduction in higher risk-weighted instruments in fourth quarter. the liquidity portfolio. Fixed costs were held broadly flat as the benefit of simplification undertaken in 2016 and other operational efficiencies offset inflationary and volume driven cost increases. Property and IT costs were tightly managed, whilst we worked closely with strategic partners to create efficiencies. We continued to optimise and prioritise our project delivery in 2017, investing £52.8 million effectively to deliver a wide range of initiatives that helped grow and protect our business, as well as meet key regulatory requirements. These included the delivery of operational and customer efficiencies from our Mortgage and Savings Lab, an upgrade of colleague IT equipment, investment in Cyber-crime and Financial crime prevention as well as the build of our IFRS 9 capability. To support the evolution of our strategy, we have also invested £38.3 million in the development of our new digital banking platform. During 2017 we actively managed the mix of our liquid asset portfolio to reduce our exposure to higher risk-weighted instruments and counterparties. Other information
60 I Virgin Money Group Annual Report 2017
Financial results
Business line results
Performance summary – Central Functions 2017 2016 £m £m Change Other income 11.7 10.7 9.3% Total income 11.7 10.7 9.3% Total costs (348.5) (336.0) 3.7%
2017 2016 £m £m Change Key balance sheet items at 31 December Risk-weighted assets 349.5 427.6 (18.3)% Operating Costs 2017 2016 £m £m Change Staff costs 190.7 188.9 1.0% Premises and equipment 30.0 28.5 5.3% Other expenses 97.4 96.7 0.7% Depreciation, amortisation and impairment 30.4 21.9 38.8% Total costs 348.5 336.0 3.7% Virgin Money Group Annual Report 2017 I 61 Strategic Report Governance
62 Letter from the Chair 64 Board of Directors Financial Results 69 Virgin Money Executive 71 Corporate Governance Report 95 Directors’ Remuneration Report 120 Directors’ Report Governance Risk Management Report Financial Statements Other Information
Virgin Money London Marathon. Photo: Virgin Money London Marathon
Virgin Money Lounge, Sheffield 62 I Virgin Money Group Annual Report 2017
Letter from the Chair
“Effective and transparent We remain committed to increasing the diversity of the corporate governance is a priority Board in the broadest sense while maintaining the necessary of the Board, facilitating the levels of skills and experience required to oversee a business delivery of our strategy and operating in a heavily regulated industry. We are pleased creating sustainable value.” to report we will achieve our stated goal of a balanced Board during 2018.
Strategic planning A key focus for the Board this year has been the development of our refreshed strategic plan. The Board has a significant role to play in determining the purpose of the Group and Dear Shareholders ensuring that the Group’s values, strategy and business I am pleased to present our Corporate Governance Report model are all aligned so as to create sustainable value for for 2017. This report sets out our approach to governance in our shareholders, customers, colleagues, corporate partners practice, the work of the Board in 2017 and includes reports and the communities in which we operate. A summary of our from the Nomination Committee, the Audit Committee and strategy is outlined on page 18. the Board Risk Committee. The report from the Remuneration Against an increasingly competitive landscape, the Board Committee is included in the Directors’ Remuneration Report. has spent time discussing the risks arising from the current The Board’s approach is to ensure that the Group applies the macro-economic environment and forthcoming structural highest principles of corporate governance and that such and regulatory changes. principles are embedded into the culture and operations of Culture the business. Our commitment to good governance underpins Virgin Money’s culture is defined through our mission to make our strategy and ensures we continually challenge our ‘everyone better off’ (EBO). Strong governance underpins assumptions and risks. a strong culture and it is important that the Board leads Board composition and succession by example and ensures that good standards of behaviour After three years as Chair, I confirmed my intention to permeate throughout all levels of the organisation. Virgin retire from the Board in 2018 and return home to the USA. Money’s culture provides the foundation for our strategy and I am grateful to Norman McLuskie, our Senior Independent the most recent results of the colleague engagement survey Director, for leading a rigorous process for the Nomination show that 90 per cent of our colleagues understand how the Committee to appoint my successor. The Board have EBO culture applies to their role. unanimously chosen Irene Dorner as Virgin Money’s next Board effectiveness Chair. We were impressed with her character and integrity, As Chair, my responsibility is to provide leadership and to her extensive business experience in the UK and abroad, and ensure that the Board environment allows for effective her detailed knowledge of retail banking. As announced on challenge resulting in high quality decision-making. The 15 February 2018, Irene will join the Board as Chair Elect annual Board effectiveness review continues to provide on 1 March 2018 and will take over as Chair on 1 April 2018 a valuable opportunity for the Board to reflect on how it following my retirement. I look forward to working with Irene operates and to propose any improvements. In line with the to ensure a smooth handover. An overview of the recruitment UK Corporate Governance Code (Code) requirements, we will process undertaken by the Nomination Committee is undertake an external Board effectiveness review in 2018. included on page 83. This year I led an internal review with the assistance of the Succession planning and the composition of the Board Company Secretary. Information on the process and outcomes remained a key focus. During 2017, Darren Pope, Eva can be found on pages 78 and 79. Eisenschimmel, Peter Bole and Amy Stirling joined the Board Regulatory framework and Marilyn Spearing and Gordon McCallum retired from the Regulatory change remains a key focus of the Board. Details Board. Further detail on Board and Committee changes in the of our plans for the implementation of projects such as year can be found at page 82. PSD2, GDPR, ring-fencing and MiFID II are set out on pages 32 and 130. In addition, we have participated in the FRC’s Virgin Money Group Annual Report 2017 I 63 Strategic Report Financial Results consultation on changes to the Code and look forward to reviewing the outcome during 2018. Looking ahead Looking forward to 2018, our corporate governance priorities will be to ensure we are ready to comply with the provisions of the new Code and implement the actions from the 2017 internal Board effectiveness review. It has been an honour to chair the Virgin Money Board over the past three years. I would like to thank each of the Directors for their continuous support and commitment throughout my time as Chair. I believe Virgin Money is very well placed to Governance make the most of the many opportunities that exist, and offer all colleagues my best wishes for success in the years ahead. Risk Management Report
Glen Moreno Chair 26 February 2018 Financial Statements Other Information
Relaxing in the Virgin Money Lounge, Manchester 64 I Virgin Money Group Annual Report 2017
Board of Directors
1 2 3 4
5 6 7 8
9 10
Chair Elect Company to join the Board Secretary 1 March 2018
11 12
Virgin Money Group Annual Report 2017 I 65 Strategic Report Financial Results
This information is provided as at 31 December 2017
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Governance
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Risk Management Report
Skills and experience Retail banking Finance Investments and pensions Consumer, marketing & distribution Core technology, operations & digital impact
0 10 20 30 40 50 60 70 80 90 100 Financial Statements Percentage of the Board Other Information 66 I Virgin Money Group Annual Report 2017
Board of Directors
Directors
1 Glen Moreno N 3 Colin Keogh Chair Independent Non-Executive Director Appointed: Appointed: January 2015 (Board), May 2015 (Chair). Glen will retire from January 2010 the Board on 31 March 2018. Skills and experience: Skills and experience: Colin has over 30 years of experience in financial services, Glen has almost 50 years of experience in business and finance. during which he has held a number of senior management He spent his early career at Citigroup where he held senior and board positions. Colin was Chief Executive of Close positions in Europe and Asia and was a member of the Policy Brothers plc. He previously held Non-Executive Director roles Committee. He was subsequently Chief Executive of Fidelity at Bràit SE, New World Resources plc and Emerald Plantation International Limited. Glen previously held Non-Executive Holdings Limited. Director roles as Chair of Pearson plc, Senior Independent External appointments: Director at Man Group, Senior Independent Director and Senior Independent Director and Chair of the Remuneration Deputy Chair at Lloyds Banking Group plc and Deputy Chair Committee of Hiscox Limited, Chair of Premium Credit Limited of the Financial Reporting Council. Glen has also served as a and Non-Executive Director of M&G Group Limited. Non-Executive Director and Chair of the Audit Committee of Promotora de Informaciones SA. 4 Geeta Gopalan Ri Re External appointments: Independent Non-Executive Director Non-Executive Director and Chair of the Capital Committee of Appointed: Fidelity International Limited. June 2015 2 Norman McLuskie Re Skills and experience: Senior Independent Director Geeta has over 25 years of experience of financial services and retail banking, particularly payments and digital innovation. Appointed: Geeta was Director of Payment Services with HBOS plc and January 2010 previously Managing Director, UK Retail Bank and Business Skills and experience: Development Head EME at Citigroup. Geeta was formerly the Norman has over 35 years of experience in financial services. Chair of Monitise Europe. She is a chartered accountant. He previously held a number of board positions at the Royal External appointments: Bank of Scotland Group (RBS), including Deputy Chief Non-Executive Director of Ultra Electronic Holdings plc and Executive and a Non-Executive Director of RBS Insurance. Wizink Bank SA, of which she is Chair of the Audit and Risk He was also Chair of Mastercard Europe. He is a chartered Committee. Geeta is also a Non-Executive Member and Vice accountant and a fellow of the Chartered Institute of Bankers Chair of the England Committee of the Big Lottery Fund. in Scotland. External appointments: None.
KEY Member of Audit Member of Committee Remuneration Committee Member of Committee Board Risk Chair Committee Member of Nomination Committee Virgin Money Group Annual Report 2017 I 67 Strategic Report Financial Results
5 Eva Eisenschimmel Re 8 Amy Stirling2 Independent Non-Executive Director Non-Executive Director/ Virgin Nominee Director Appointed: January 2017 Appointed: December 2017 Skills and experience: Eva has 30 years of experience as a brand and marketing Skills and experience: professional. She was previously Managing Director of Amy is Chief Financial Officer of the Virgin Group. She has Marketing, Brands and Culture at Lloyds Banking Group plc, extensive board, financial and management experience Chief Customer Officer at Regus plc, and Chief People and from senior and board roles in a range of sectors including Brand Officer at EDF Energy. Eva has also held senior positions telecommunications, financial services and commerce. She at Allied Domecq and British Airways. was previously Non-Executive Director at Pets at Home and the Governance UK Cabinet Office. Amy is a chartered accountant. External appointments: Chief of Staff at Lowell. External appointments: Chief Financial Officer of the Virgin Group and Non-Executive 6 Darren Pope A Re Director and member of the Audit and Risk Committee and the Independent Non-Executive Director Valuation Committee at RIT Capital Partners plc. Appointed: 9 Jayne-Anne Gadhia CBE March 2017 Executive Director and Chief Executive
Skills and experience: Risk Management Report Appointed: Darren has over 30 years of experience in retail banking and March 2007 financial services. Darren held the post of Chief Financial Officer of TSB Bank plc, having taken a lead role in the design Skills and experience: and divestment of the TSB business from Lloyds Bank plc and Jayne-Anne has 30 years of experience in finance and banking. its subsequent IPO and takeover. He previously held a number She was one of the founders of Virgin Direct, launching the of executive and senior roles at Lloyds Banking Group plc Virgin One Account in 1998. Following the acquisition by including Retail Bank Commercial Director. He is a fellow of the RBS of the Virgin One Account, Jayne-Anne went on to lead Chartered Institute of Certified Accountants. a number of RBS business units, ultimately joining the RBS Retail Executive Board where she was responsible for RBS’s External appointments: mortgage business. Jayne-Anne re-joined Virgin Money as Independent Non-Executive Director and Chair of Audit Chief Executive in 2007. She is a chartered accountant. Committee of Equiniti Group plc.
External appointments: Financial Statements 7 Patrick McCall1 Trustee of Tate (Government appointment) and Chair of The Non-Executive Director/VEL Nominee Director Great Steward of Scotland’s Dumfries House Trust3. Jayne- Anne has a number of advisory roles including as a director of Appointed: UK Finance and on Mastercard Europe’s Advisory Board. Jayne- June 2012 Anne is the Government’s Women in Finance Champion. Skills and experience: Patrick is a senior executive in the Virgin Group. He has extensive board, financial and management experience across a range of sectors including financial services, retail, travel and healthcare. Patrick was previously an investment banker at SG Warburg.
External appointments: Other Information Senior Managing Director of the Virgin Group and Non- Executive Director of Virgin Active and Virgin Trains East Coast, Co-Chair of Virgin Rail Group and Chair of Virgin Galactic and Virgin Orbit. 2 Appointed pursuant to the terms of the Relationship Agreement with Virgin Group 1 Appointed as the representative director of Virgin Enterprises Limited (VEL) pursuant to Holdings Limited, as described on page 80. the terms of the Virgin Money Trade Mark Licence Agreement. 3 Bodies not for commercial purpose. 68 I Virgin Money Group Annual Report 2017
Board of Directors
10 Peter Bole Chair Elect Executive Director and Chief Financial Officer 12 Irene Dorner Appointed: Chair Elect July 2017 Appointed: Skills and experience: To join the Board 1 March 2018. Will take over Chair on Peter has over 25 years of experience in financial services. 1 April 2018. Following roles with Deloitte and Standard Life, Peter joined Skills and experience: RBS in 2001 where he held a variety of senior finance roles, Irene has over 30 years of experience in financial services. Irene latterly in RBS Insurance. In 2009, he joined Tesco Bank where was Group Managing Director of HSBC Group and CEO and he established the finance function as Chief Financial Officer President of HSBC USA, with responsibility for all of HSBC’s and played a key role in the leadership of the business as it was operations in the USA, until December 2014. During a 29 year migrated from RBS infrastructure. Peter joined Virgin Money in career at HSBC she held a number of senior roles including 2016. Peter became Chief Financial Officer in January 2017 and Deputy Chair and CEO, Malaysia and General Manager of joined the Board in July 2017. He is a chartered accountant. Premier and Wealth Management in the UK. External appointments: External appointments: None. Non-Executive Director and Chair of Control Risks International Limited and Non-Executive Director and Company Secretary member of the Audit Committee of AXA SA. Irene is also a 11 Katie Marshall Non-Executive Director and a member of the Nominations and Company Secretary Governance Committee, Safety and Ethics Committee and Appointed: Audit Committee of Rolls-Royce Holdings plc. Irene is also a September 2013 Trustee of SEARRP (the South-East Asia Rainforest Research Partnership) (Malaysia). Skills and experience: Katie joined Northern Rock in 2009, following ten years as a corporate lawyer at Eversheds LLP, and subsequently joined Virgin Money in January 2012. Katie was appointed Company Secretary in September 2013. She is a qualified solicitor. Virgin Money Group Annual Report 2017 I 69 Strategic Report Virgin Money Executive Financial Results
Board members 1 Jayne-Anne Gadhia CBE Chief Executive Jayne-Anne joined the Board in March 2007 as Chief Executive. Jayne-Anne is also an Executive Director of Virgin Money plc. 1 2 Further details can be found on page 67.
2 Peter Bole Chief Financial Officer Peter joined the Board in July 2017 as Chief Financial Officer. Peter is also an Executive Director of Virgin Money plc. Governance Further details can be found on page 68.
3 4 Non Board members 3 Marian Martin Chief Risk Officer Marian is a chartered accountant and qualified with Ernst & Young. She joined the Britannia Building Society where she
was an Internal Audit Manager, before spending four years at Risk Management Report the Britannic Group where she was Head of Group Audit and Risk. Marian joined RBS in 2004 and served as Risk Director of RBS’s consumer finance businesses, the RBS mortgage 5 6 business and then Tesco Personal Finance. Marian joined Virgin Money as Chief Risk Officer in 2007. Marian is an Executive Director of Virgin Money plc.
4 Matt Elliott People Director Matt’s early career was at RBS, where he worked on HR policy and employment issues, before supporting the HR 7 8 transformation programme following the acquisition of Financial Statements NatWest. Matt held senior HR roles in several RBS operating businesses including the Consumer Finance division and Tesco Personal Finance. In 2007 Matt moved to BP as Senior Manager for Corporate and Functions before becoming HR Vice President for BP in North Africa. Matt joined Virgin Money as People Director in 2011.
5 Michele Greene 9 10 Managing Director – Virgin Money digital bank Michele is a chartered accountant and qualified with KPMG. She spent three years at Credit Lyonnais as a financial accountant before joining Goldman Sachs as group Other Information accountant. Michele then spent over 15 years at MBNA, most recently as Chief Finance Officer, where she was a member of the board and closely involved in setting the strategic direction of the business. Michele joined Virgin Money in October 2013. 11 70 I Virgin Money Group Annual Report 2017
Virgin Money Executive
6 Hugh Chater 9 Caroline Marsh Managing Director – Core Bank Social Enterprise Director Hugh has over 25 years of experience in financial services. Caroline has over 30 years of experience in banking. Her He was an executive founder at MBNA Europe, joining in early career was at Barclays where she spent 12 years in 1993 from KPMG Management Consulting. At MBNA Hugh management roles. In 1999, she joined Virgin One as Sales held executive roles in HR, Credit Management, Customer Director. Following the acquisition of Virgin One by RBS in Satisfaction and Marketing before becoming Chief Operating 2001, Caroline became Sales and Operations Director for Officer and then UK Managing Director. In 2007 Hugh joined the RBS consumer finance business, before leading RBS’s RBS Retail to run the consumer credit card business. He intermediary mortgage business. Caroline returned to Virgin subsequently ran the current account, savings, investments Money in 2007 and led the cultural agenda for the Virgin and insurance products. Hugh joined Virgin Money in Money business from the acquisition of Northern Rock in 2012 June 2016. until the end of 2017.
7 Mark Parker 10 Tim Arthur Chief Operating Officer Creative Director Mark’s first IT Director role was at British Sugar. In 2001, Prior to joining Virgin Money, Tim was Global Chief Executive Mark joined the HBOS Group. After serving as Group of Time Out. He led its expansion across Asia and the US and Services Director and Chief Information Officer, he then was responsible for transforming the brand from a print media became Managing Director of Intelligent Finance. Mark business to a global digital platform. Before that, Tim was CEO joined Northern Rock as Chief Operating Officer in 2009 and of Cardboard Citizens and CEO/Artistic Director of two arts subsequently joined Virgin Money in January 2012. venues. He is also a playwright and author. Tim joined Virgin Money in 2016. 8 Andrew Emuss General Counsel 11 Ken Donald Andrew qualified as a solicitor in 1996. He started his career Corporate Development Director at Clifford Chance, qualifying as a corporate lawyer, and has Ken is a chartered accountant and has over 10 years of spent over 20 years acting on corporate and capital markets experience in financial services. Ken started his career at RBS deals. He spent over ten years at Nomura and served as where he latterly worked in the Investment Banking Division, its Head of Corporate Development for EMEA, executing advising UK and Irish Banks, Building Societies and Insurance strategic deals. Andrew joined Virgin Money as General companies. He also held a number of roles across the retail, Counsel in June 2014. business services, group strategy and corporate finance areas of RBS. Ken joined Virgin Money in 2014. Prior to his current role he ran the Chief Executive’s Office. Virgin Money Group Annual Report 2017 I 71 Strategic Report Corporate Governance Report Financial Results
This report sets out Virgin Money’s approach to governance in practice, the work of the Board and its Committees and explains how the Group applied the principles of the Code during 2017. Leadership Purpose and responsibilities The Board is collectively responsible for the long-term success of Virgin Money. It achieves this by setting the strategy and overseeing delivery against it. It establishes the culture, values and standards of the Group, managing risk, monitoring financial performance and reporting and ensuring that appropriate and effective succession planning arrangements and remuneration policies are in place. The role of the Directors and Company Secretary Set out below are the key roles and responsibilities of the Chair, other Board members and the Company Secretary. There is a clear division of responsibility at the head of the Group. The Chair has overall responsibility for the leadership of the Board while Governance the Chief Executive leads the business.
Chair Chief Executive The Chair has overall responsibility for the leadership of the Board and The Chief Executive leads the Group on a day-to-day basis in all areas promotion of the highest standards of corporate governance. The Chair affecting the operations, performance and strategy of the Group’s sets the Board’s agenda to ensure focus on the right matters. The Chair business (with the exception of those matters reserved to the Board). plans Board and Executive succession and appointments in conjunction The Chief Executive provides leadership and direction to senior with the Nomination Committee and ensures effective communication management and co-ordinates all activities to implement the Group’s with shareholders. The Chair leads the development of the Group’s strategy and to manage the business in accordance with risk appetite. ikMngmn eotFinancial Statements Risk Management Report culture by the Board as a whole. The Chief Executive has responsibility for overseeing the adoption of the Group’s culture in the day-to-day management of the Group. Non-Executive Directors Senior Independent Director The Non-Executive Directors help to develop and set the Group’s The Senior Independent Director (SID) acts as a sounding board for the strategy. They provide constructive challenge, participate actively Chair and Executive Directors on Board and shareholder matters and in the decision-making process and scrutinise the performance of is a conduit, as required, for the views of the other Directors. The SID management. The Non-Executive Directors provide entrepreneurial conducts the Chair’s annual performance review and is available to leadership of the Group within a framework of prudent and effective shareholders as required. controls, satisfy themselves as to the integrity of financial information and systems of risk management and determine appropriate levels of remuneration of the Executive Directors via the Remuneration Committee. Chief Financial Officer Company Secretary The Chief Financial Officer (CFO) is responsible for the financial The Company Secretary provides practical support to the Directors management of the Group and the day-to-day management of the with particular emphasis on supporting the Non-Executive Directors in balance sheet including ensuring the business remains well capitalised. maintaining appropriate standards of probity and corporate governance The CFO ensures that the Group delivers statutory reporting obligations, and providing advice to Directors on the discharge of their duties. The meets regulatory capital and liquidity requirements and identifies Company Secretary is responsible for facilitating communications with opportunities to improve the commercial performance of the business shareholders as appropriate. within the agreed risk appetite. Other Information 72 I Virgin Money Group Annual Report 2017
Corporate Governance Report
Board and governance structure
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Board authority Each Board Committee comprises Independent Non- The Board authority sets out the matters reserved to the Executive Directors. The Nomination Committee also Board. This includes decisions concerning the strategy and comprises the Board Chair and the Virgin Nominee Director. long-term objectives of the Group, capital and financial Each Committee Chair reports to the Board on the activities budgets, significant contracts and transactions, and various of the Committee. The Terms of Reference for each Board statutory and regulatory approvals. The Board authority Committee can be found at virginmoney.com/virgin/ delegates responsibility for day-to-day leadership of the investor-relations. business to the Chief Executive and sets out the basis for delegation of authorities from the Board to Board Group entity governance Committees. The Chief Executive delegates aspects of their The Group’s banking business of residential mortgages, own authority, as permitted under the corporate governance savings and credit cards is conducted through Virgin Money framework, to members of the Executive and the Executive plc (Bank) which is regulated by the Financial Conduct Committees. As well as regularly discussing business Authority (FCA) and Prudential Regulation Authority (PRA). performance, the Executive Committees meet monthly to The composition of the board of the Bank replicates that consider key business matters. Certain Executive Committees of the Company, save for the following: the Virgin Nominee meet more frequently as required. Director and the VEL Nominee Director are not members of Details of Board reserved matters can be found at the board of the Bank and the Chief Risk Officer (CRO) is an virginmoney.com/virgin/investor-relations. additional Executive Director. The role of the Board Committees The Group has two FCA regulated subsidiaries, Virgin Money The Board is supported by its Committees which make Unit Trust Managers Limited (VMUTM) and Virgin Money recommendations to the Board on matters delegated to them, Personal Financial Service Limited (VMPFS) which carry in particular in relation to internal control, risk management, out the Group’s financial services business of investments, financial reporting, governance, succession planning and insurance and other ancillary financial services. Two of the remuneration matters. The current Board Committees are Company’s Non-Executive Directors and each of the Bank’s set out above. Executive Directors are on the VMUTM board. The VMPFS board is made up of the Bank’s Executive Directors. Virgin Money Group Annual Report 2017 I 73 Strategic Report Financial Results
Virgin Money Giving Limited (VMG) is a not-for-profit to a minimum of 36 days per year and may be expected to company within the Group and the vehicle for Virgin Money’s relinquish other appointments to ensure that they can meet charity fundraising and donations website. VMG has two the time commitments of their role. The Chair is committed to Independent Non-Executive Directors on its board, one of this being their primary role, limiting their other commitments whom is Chair. to ensure they can spend as much time as the role requires. The Virgin Money Foundation (The Foundation) is an The time devoted to the Group’s business by the Non- independent charity which awards grants aimed at tackling Executive Directors is in reality significantly more than the social and economic disadvantage and the sustainable minimum requirements. In 2017 the SID devoted additional regeneration of deprived communities. The Foundation is time to their role in leading the Chair succession process. managed and controlled by a board of independent Trustees. Executive Directors must seek authorisation from the Board The Board before accepting any additional responsibilities or external Governance appointments, and are restricted to holding no more than Board size two Non-Executive Director roles (excluding roles with bodies The Board is of sufficient size and composition to reflect a not for commercial purposes). At 31 December 2017, the broad range of views and perspectives whilst allowing all Executive Directors were compliant with this requirement and Directors to participate effectively in meetings. continue to be at the date of this report. The number and quality of Independent Non-Executive Conflicts of interest Directors on the Board facilitates effective challenge to the The Directors must avoid any situation which might give Executive. As at 31 December 2017, the Board comprised two rise to a conflict between their personal interests and those Executive Directors, seven Non-Executive Directors (five of Financial Statements Risk Management Report of the Group. Prior to appointment, potential conflicts of whom are considered to be independent) and the Chair, who interest are disclosed and assessed to ensure that there are no was independent on appointment. Details on Board changes matters that would prevent the incoming Director from taking in the year and up to the date of this report are included in the the appointment. Directors’ Report. Directors are responsible for notifying the Chair and the Further details on independence, succession planning and Company Secretary as soon as they become aware of any the appointment process are set out in the Nomination potential or actual conflicts. Committee Report. In addition, changes to the commitments of all Directors Executive Director service agreements and Non-Executive are reported to the Board and a register of conflicts is Director terms of appointment regularly reviewed by the Chair to ensure the authorisation The Chair is appointed for an initial three year term which may remains appropriate. be terminated on six months’ notice by either the Chair or the Company. The Non-Executive Directors are appointed for a If any potential conflict arises, the relevant Director will twelve month term and each of the Non-Executive Directors excuse themselves from any meeting or discussions where the may have their appointment terminated in accordance with potential conflict is considered, and all relevant material will the Articles of Association of the Company, their letters of be restricted. All potential conflicts authorised by the Board appointment or statute at any time without compensation. are recorded in a register of Directors’ Conflicts of Interest. The Group’s conflict procedures will be revisited in early 2018 The service agreements of the Chief Executive and CFO are in light of the forthcoming Financial Services Banking Reform terminable by either the Company or the individual giving Act 2013 (ring-fencing). twelve months’ notice. At one Board meeting the VEL Nominee Director excused All Directors are subject to annual re-election by shareholders. himself from discussions in relation to the Virgin Money The service agreements and letters of appointment of all
Trademark Licence Agreement due to a potential conflict Other Information Directors are available for inspection by shareholders at the of interest as a result of Virgin Enterprises Limited Company’s registered office. (VEL) being a related party as detailed in note 35 to the Time commitments Financial Statements. Each Non-Executive Director is required to devote such time as is necessary for the effective discharge of their duties 74 I Virgin Money Group Annual Report 2017
Corporate Governance Report
Diversity policy inclusion, including its consideration in Board appointments, Diversity and inclusion are strategic priorities for the Group. is set out in the Nomination Committee Report on page 85 and Information on the Group’s approach to diversity and the Strategic Report on pages 14 to 15 and 22 to 23. Key Board focus in 2017 The following table provides an overview of the key matters considered by the Board in 2017:
Financial Strategy and customer focus Culture and value > Approval of 2018 budget > Review of progress against the Group’s > Enhanced monitoring of conduct (including > Approval of financial results and strategy customer outcomes) presentations > Approval of four-year strategic and funding > Monitoring of culture and values, including > Approval of dividends plans oversight of staff survey results > Approval of the Internal Liquidity Adequacy > Oversight of Capital Markets Update > Oversight of the social enterprise agenda Assessment Process (ILAAP) > Consideration of potential acquisition and community priorities > Oversight of the capital base opportunities and strategic initiatives > Approval of funding issuances > Oversight of the Virgin Money digital bank strategy > Oversight of implementation of IFRS 9 > Review of credit risk and customer behaviour metrics
Risk management Governance and shareholders Regulatory > Approval of risk appetite and risk > Review of Board and Committee structure Overseeing the implementation of measures to management framework and composition ensure compliance with: > Approval of the Internal Capital Adequacy > Review of the corporate governance > Ring-fencing/structural reform Assessment Process (ICAAP) framework > Recovery and resolution > Review of aggregate risk exposures, risk/ > Overseeing Board and Executive succession > Senior Managers and Certification Regime return and emerging risks planning and appointment > GDPR, PSD2 (open banking) > Review of internal control systems > Overseeing Board effectiveness and Chair > MREL and other regulatory changes > Approval of stress test results performance reviews > Oversight of operational resilience including > Receiving Investor Relations updates monitoring cyber resilience including oversight of investor reporting > Oversight of key partnership relationships > Approval of AGM Notice of Meeting Virgin Money Group Annual Report 2017 I 75 Strategic Report Financial Results
How does the Board consider stakeholder views? The Board understands the importance of its stakeholders to the business.
The Board: The Board: > Monitored customer satisfaction, retention, > Monitored colleague engagement outcome (including complaints) metrics > Monitored progress against the diversity and inclusion > Oversaw the broadening of the customer strategy to create a diverse Board and workforce proposition (e.g. SME and digital bank plans) > Reviewed talent, capabilty, succession and > Oversaw the rigorous programme of customer development programmes listening and operational improvements > Listened to colleagues through office and store visits > Further detail on how Virgin Money delivered and attended annual colleague awards ceremony
for its customers is included on page 20 > Further detail on how Virgin Money delivered Governance for its colleagues is included on page 22
Customers Colleagues The Board: > Received regular reports on the performance of mortgage intermediary partnerships Virgin The Board: including the optimisation of operational > Oversaw the delivery of the Group’s improvements Corporate Money Community strategy Financial Statements Risk Management Report Community > Monitored strategic and outsourcing Partners EBO > Monitored progress against the Group’s partnerships, including the new partnership environmental strategy to manage and reduce with Virgin Atlantic environmental impacts > Oversaw the development of the Group’s > Further detail on how Virgin Money delivered Company policies and approach to anti-bribery, human for the Community is included on page 26 rights and modern slavery & Shareholders > Further detail on how Virgin Money delivered for its corporate partners is included on page 24 The Board: > Oversaw the delivery of the strategy > Engaged with the shareholders on a regular and ad hoc basis, through results briefings, the Capital Markets Update, individual investor meetings, roadshows and its Annual General Meeting (AGM) > Further detail on how Virgin Money delivered for the Company and its shareholders is included on page 80 Other Information 76 I Virgin Money Group Annual Report 2017
Corporate Governance Report
Board agenda and attendance are structured to allow adequate time for discussion, in Setting the Board agenda particular of strategic matters and any other matters which The Chair is responsible for setting the Board agenda. Prior to the Non-Executive Directors wish to raise. each Board meeting, the Chair reviews the agenda and time Board meetings and activity in 2017 allocation with the Company Secretary and discusses key The following timeline provides an overview of the Board items of business with the Chief Executive. Board agendas meetings and activity in 2017:
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Key Deep dives included: Site visits Board meeting (including site visits) B > Credit cards > Mortgage Lab Treasury > Mortgage Operations Board meeting and deep dive BD > > Virgin Money digital bank > Contact Centre Board meeting and strategy discussion BS > Colleague Survey results > Security Operations Results Board Meeting RB > IFRS 9 > Colleague Awards Ceremony CEO Briefing Call CB > ILAAP > Gosforth Office > ICAAP > Edinburgh Office
Board Strategy Review During 2017, the Board spent considerable time discussing the investment required for the core business and the new initiatives. Group’s strategy. The strategic review included the external Further detail can be found on pages 30 to 39. environment, 2018 budget and the four year financial plans. Further The Board also spent time considering updates received from the detail on the Group’s strategy is set out on pages 18 to 19. Board Committees on the Group’s strategy (including funding and The Board assessed the opportunities and challenges presented by capital plans and organisational design changes to align to the future the macro-economic, market and regulatory developments. These strategy). included risk appetite to ensure Virgin Money’s lending discipline The Board’s key focus during these discussions was to ensure the continues to support asset quality and delivery of sustainable returns refreshed strategy provides a strong platform for long-term success through the cycle; funding plans; assessment of the impact of of business whilst also enabling the continued delivery of innovative regulatory change of Open Banking, PSD2 and ring-fencing; and the products and outstanding service to customers. Virgin Money Group Annual Report 2017 I 77 Strategic Report Financial Results
Attendance at meetings Cyber resilience In 2017, a total of 17 Board meetings were held consisting of: It remains Virgin Money’s goal to be consistently one of 13 that were scheduled (including four which approved release the safest banks in the UK. The Board continues to play an of the financial results) and four ad hoc meetings which were important role in overseeing the Group’s cyber resilience project and strategy related. Where a Director is unable approach and the level of investment in cyber security. to attend a meeting, they have the opportunity to review Geeta Gopalan is the Board’s accountable Non-Executive any papers and provide comments to the Chair, who then Director responsible for leading focus on cyber security endeavours to represent the Director’s views at the meeting. at Board level. The attendance of Directors at Board and Committee The Board provides robust challenge and scrutiny to meetings during the year is set out below. The number of
ensure that the Group is adequately mitigating the meetings held during the period that the Director held office is Governance threats it faces. Virgin Money’s cyber resilience strategy shown in brackets. The Chair attends all Committee meetings is reviewed by the Board on an annual basis with specific at the invitation of the Committee Chairs. detailed reporting on progress provided regularly. The review takes into account the latest cyber threat intelligence assessment. This ensures that the strategy remains fit for purpose to combat the potential cyber threats the Group may face, as well as remaining aligned to the overall business objectives of the Group. ikMngmn eotFinancial Statements Risk Management Report
Board Board Remuneration Nomination Risk Audit Virgin Money Holdings (UK) plc meetings Committee Committee Committee Committee Directors who served during 2017 Glen Moreno 17(17) – 9(9) – – Norman McLuskie 17(17) 4(4) 9(9) 5(5) 7(7) Colin Keogh1 15(17) – 7(9) 5(5) 7(7) Marilyn Spearing2 5(6) 2(2) 1(2) 2(2) 2(2) Geeta Gopalan 17(17) 4(4) 9(9) 5(5) 7(7) Eva Eisenschimmel3 17(17) 3(3) 9(9) 5(5) 7(7) Darren Pope4 13(13) 2(2) 8(8) 3(3) 5(5) Gordon McCallum5 10(13) – 6(8) – – Patrick McCall 17(17) – – – – Jayne-Anne Gadhia CBE 17(17) – – – – Peter Bole6 7(7) – – – – Amy Stirling7 0(0) – – – –
1 Colin Keogh was unable to attend two ad hoc Board and Nomination Committee meetings held on short notice due to a conflict with external appointments. 2 Marilyn Spearing retired from the Board on 3 May 2017 and was unable to attend the final Board and Nomination Committee meetings of her tenure due to a conflict with external appointments.
3 Eva Eisenschimmel was appointed to the Board on 25 January 2017. Other Information 4 Darren Pope was appointed to the Board on 1 March 2017. 5 Gordon McCallum resigned from the Board on 31 October 2017 and was unable to attend three Board and two Nomination Committee meetings held on short notice. 6 Peter Bole was appointed to the Board on 25 July 2017. 7 Amy Stirling was appointed to the Board on 20 December 2017. 78 I Virgin Money Group Annual Report 2017
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Board effectiveness The review of Committee performance also included an Skills and experience of the Board assessment of whether each Committee had met its required As illustrated by the Board biographies on pages 66 to 68, responsibilities. the Non-Executive Directors have a broad range of skills and The Chair met with each Non-Executive Director in early 2018 experience. During 2017, the skills of the Board were enhanced to discuss their contributions and effectiveness, and reported by the appointment of Eva Eisenschimmel who brings to the Nomination Committee on the output. The Chair extensive experience as a brand and marketing professional also conducted the Chief Executive’s annual performance and Darren Pope who provides significant financial and retail appraisal. This activity supported the annual review of Board banking experience (as well as transformational project composition and recommendations on Director election/ experience). Additionally, Amy Stirling adds financial and re-election to be put to the shareholders at the 2018 AGM. In management experience from a range of sectors and brings parallel, the SID assessed the Chair’s performance, seeking specific expertise in accounting, tax and treasury matters. input from the other Directors. Annual effectiveness reviews Key themes were then collated together with the output The 2017 internal Board effectiveness review, led by the Chair from the Directors’ individual performance reviews and with support from the Company Secretary, took the form of presented to the Nomination Committee in February 2018 and interviews with each Board member and key stakeholders discussed separately at the respective Committee meetings from across the business in December 2017 and January 2018. as appropriate. This was followed by a full discussion by the The review sought the Directors’ views on a range of topics Board, reviewing what had worked well within the year and including the mix of skills, experience, independence and focus areas for 2018. knowledge on the Board and Committees, Board culture and In line with best practice, the Group will undertake its next dynamics, the quality of information provided to the Board, externally facilitated review of Board effectiveness in 2018. the effectiveness of Committees (including composition and This exercise will serve as an invaluable tool for the new member contribution) and how they are connected with the Chair providing independent insight on the Board and its Board and the quality of discussion (including areas of depth effectiveness as well as informing and supporting future of engagement) and clarity of the decision-making process. succession planning. The review also assessed and sought views on the progress against the key recommendations and priorities identified in the 2016 effectiveness review. Virgin Money Group Annual Report 2017 I 79 Strategic Report Financial Results
A summary of the key findings and recommendations are set out below:
Key conclusions from 2017 Board Effectiveness Review Board composition, Board culture, dynamics and contribution > Board succession planning will remain a key focus for 2018 and > A well balanced and diverse Board in terms of skills, experience beyond, led by the new Chair; and and independence; strengthened further by the 4 new Board > Comprehensive review of Executive talent, capability and appointments; succession plans to ensure aligned to current and future strategy. > Board culture of mutual trust and respect, open communication, Board basics: Board support, forward agenda and quality of commitment, improved challenge and support by all members; information and > Continued high quality of Board information, with transparent > Use of a variety of Board forums continues to work well. information flow;
Board focus and depth of engagement > Increased efficiency in Board processes and meetings; Governance > Good balance between strategic, operational and governance > Continued focus required on the forward agendas; and matters achieved in 2017, although will this remain an area of
ongoing focus; > 2018 Board schedule to accommodate increased time for Board discussion. > Significant Board interaction and engagement on strategy, threats and opportunities and risk appetite; Board Committees > Effective and well-balanced Board Committees, with a good mix > Increased focus on external landscape (market environment, of skills and experience; strengthened by the new Non-Executive competition, regulatory agenda), concluding a series of Board Director appointments; briefings (further detail on page 76); > Open and constructive contribution, engagement and challenge; > Significant focus in 2017 on funding, capital and liquidity as part
Financial Statements Risk Management Report of strategic planning, ICAAP and ILAAP processes with the risk > Successful transition of new Committee Chairs; and agenda to remain a key focus for 2018 and beyond; and > Continued focus in 2018 required on Committee forward agendas, and opportunities for improved Committee reporting. > Increased ‘line one’ reporting and representation at Committees planned for 2018 to enhance the Board’s assessment of risk and prioritisation of critical issues. Board succession and leadership to ensure that talent development and succession planning are aligned with the current and future strategy > Significant focus and progress focus in 2017 on Board leadership and succession matters. Highlights included four Directors joining the Board, together with a rigorous Chair search process leading to the appointment of Irene Dorner as Chair Elect;
Board induction The Chair, facilitated by the Company Secretary, ensures that all > a detailed programme across Risk and Finance focusing on: Directors receive a full induction tailored to their individual needs risk appetite and profile, culture and framework, compliance with regard to their specific role and experience. This ensures that and conduct risk, financial analysis and controls, capital, stress Directors are able to make an informed contribution based on an testing, liquidity, recovery and resolution planning and regulatory understanding of the Group’s business model and the challenges it developments; faces. > an overview of the Legal and People functions, including the During 2017 and up to the date of this report Darren Pope, Eva people and remuneration strategies and Remuneration Code Eisenschimmel and Amy Stirling’s induction processes comprised: requirements; and > meet and greet sessions with the Board, Executive and senior a business introduction including a strategy overview containing > management to understand the Group’s culture along with visits business risks and opportunities; to the Group’s various sites including some stores and lounges.
> an introduction to operations, products, the customer and the Other Information competitive environment, along with a view of future product strategy; > an overview of the Group’s approach to governance, including training on the responsibilities of a Director in a listed company and the impact of the Senior Managers Regime on Non-Executive Directors; 80 I Virgin Money Group Annual Report 2017
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Training through whom the Chair and other Non-Executive Directors Professional development and training are kept up to date during the year with the views of Virgin. The Chair is responsible for the training and professional The Chair and Chief Executive have an ongoing dialogue with development of Board members. The training programme, the Virgin Nominee Director throughout the course of the delivered throughout the year, comprises both formal and year. Gordon McCallum retired as the Virgin Nominee Director informal sessions on current or emerging issues. Tailored in October 2017 and the Group welcomed Amy Stirling in his sessions on specific business topics are a key component of place in December 2017. the programme. The Company Secretary maintains a training The Company has complied with the terms of the Relationship and development log for each Director. Agreement and, so far as the Company is aware, the Site visits also play an important role by helping to connect independence provisions contained in the Relationship Directors with the business, colleagues and customers’ needs. Agreement have been complied with by Virgin (and Directors are also invited to attend courses, management its associates). meetings and one-to-one meetings with Executives. Investor relations and contact Shareholder/Stakeholder engagement and The Investor Relations Director has primary responsibility for relationships managing and developing the Group’s external relationships Details of how Virgin Money considers stakeholder views are with shareholders, potential investors and analysts. These included on page 75. communications are effected through a combination of In respect of shareholders, the Board recognises the need for briefings to analysts and institutional investors, individual a programme of engagement which offers all shareholders discussions with shareholders and potential investors, opportunities to receive information directly and to enable regulatory announcements, press releases and updates on the them to share their views with the Board. Group’s website. Controlling shareholder The Board receives reports from the Investor Relations During 2017 the Group’s ‘controlling shareholder’ for the Director. This ensures that the Board are informed of purposes of the Listing Rules was Virgin. Details of Virgin’s significant market developments, share price performance shareholding can be found on page 123. The Company is and changes in the shareholder base. party to a Relationship Agreement with Virgin. The principal In 2017, the Group engaged with corporate shareholders and purpose of the Relationship Agreement is to ensure that the potential investors on an individual basis through investor Group is capable of carrying on its business independently presentations and attendance at investor conferences. of its ‘controlling shareholder’. The Relationship Agreement Additionally, the Chair hosted meetings with some of the provides for the appointment of a nominee director by Virgin Group’s largest institutional shareholders focused on the 2017 Shareholder engagement
January to March April to June > Publication of the ARA > Analyst briefings > Q1 trading statement > Publication of AGM Notice and voting materials > AGM held > Ad hoc proactive and reactive shareholder engagement > Dividend (final) via Chief Executive, CFO, and Remuneration Committee Chair > Ad hoc proactive and reactive shareholder engagement via Chief Executive, CFO and Chair July to September
> Half year results October to December > Analyst briefings > Dividend (interim) > Q3 statement > Corporate governance meetings with > Capital Markets Update institutional shareholders > Ad hoc proactive and reactive shareholder > Ad hoc proactive and reactive shareholder engagement engagement via Chief Executive, CFO and Chair via Chief Executive, CFO and Chair Virgin Money Group Annual Report 2017 I 81 Strategic Report Financial Results
Group’s corporate governance arrangements. The meetings Financial Services Sector, it is the intention that the function were structured to allow for an open dialogue and discussion will be subject to an independent external assessment on the matters of importance to institutional shareholders every five years. including strategy, Board composition and succession. In establishing and reviewing the system of internal control, The Group will maintain an active dialogue with shareholders, the Directors consider the nature and extent of the risks potential investors and analysts to discuss the performance of facing the Group, the likelihood of a risk event occurring and the Group, its strategy and new developments in 2018. the potential financial impact of failure. A system of internal Company Secretary and retail shareholders control is designed to manage, rather than eliminate, the The Company Secretary oversees communications with risk of failure to achieve business objectives. It therefore can individual retail investors. provide only reasonable but not absolute assurance against
the risk of material mis-statement or loss. Governance The Group’s registrar, Equiniti Limited, provides a dedicated shareholder online and telephone dealing service to assist The policies supporting the Group’s risk management shareholders in managing their investments. framework define minimum standards for controls for all material risk classes. Internal control Business areas and support functions assess on a quarterly The Board is responsible for the Group’s system of internal basis the internal controls in place to address all material risk control. The system is designed to facilitate effective and exposures across all risk classes. This review considers the efficient operations and to ensure the quality of internal effectiveness of these material controls, including financial, and external reporting and compliance with applicable laws operational and compliance controls. Financial Statements Risk Management Report and regulations. Further information on risk control and management is set out The Group uses a ‘Three Lines of Defence’ model. Further in the Risk Management Report. detail can be found on page 127. The Directors and Executive are committed to maintaining a Statement of compliance robust control framework as the foundation for the delivery UK Corporate Governance Code of effective risk management. The Directors acknowledge The 2016 version of the Code, which can be accessed at their responsibilities in relation to the Group’s systems of www.frc.org.uk, applied to the Group’s 2017 financial year. The risk management and internal control and for reviewing their Directors have considered the contents and recommendations effectiveness and conducted a review covering internal audit of the Code and confirm that throughout the year the Group reports, risk assurance reports and an overall analysis of the has applied the main principles and complied with the risk management framework during the year. provisions of the Code. In 2017, the Group completed its action plan to address all The Group looks forward to the publication of the outcome of recommendations from the Deloitte LLP External Quality the FRC’s consultation on changes to the Code. Assurance Review of the Group’s Internal Audit function Committee reports produced in 2015 and referred to in the 2016 Corporate The following pages contain reports from each of the Governance Report. In line with the Chartered Institute of Board’s Committees with the report from the Remuneration Internal Auditors’ Guidance on Effective Internal Audit in the Committee included in the Directors’ Remuneration Report. Other Information 82 I Virgin Money Group Annual Report 2017
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Nomination Committee Report
Membership and meetings Meetings attended (held) in Independent 20171 Committee Chair Glen Moreno Yes (on 9(9)2 appointment) Committee members “We continue to focus on the composition, skills and experience of the Board. Chair succession has been a key Norman McLuskie Yes 9(9) focus for the Committee during 2017.” Colin Keogh3 Yes 7(9) 4 Glen Moreno Marilyn Spearing Yes 1(2) Chair, Nomination Committee Geeta Gopalan Yes 9(9) Gordon McCallum5 No 6(8) Eva Eisenschimmel Yes 9(9) Darren Pope6 Yes 8(8) Amy Stirling7 No 0(0)
1 Number of meetings held during the period the member held office. 2 Norman McLuskie acted as Chair for all discussions in relation to Chair succession. 3 Colin Keogh was unable to attend two ad hoc meetings held on short notice due to a conflict with external appointments. 4 Marilyn Spearing retired from the Committee on 3 May 2017 and was unable to attend the final Committee meeting of her tenure due to a conflict with an external appointment. 5 Gordon McCallum retired from the Committee on 31 October 2017 and was unable to attend two prior meetings held on short notice. 6 Darren Pope joined the Committee on 1 March 2017. 7 Amy Stirling joined the Committee on 20 December 2017.
Chair’s overview Succession planning and the composition of the Board and its Committees were a key focus during 2017. In July 2017, I confirmed my retirement from the Board in 2018 to return home to the USA. I considered it the right time, with the completion of my three year term due in January 2018, for the business to appoint a new Chair to oversee delivery of the next phase of Virgin Money’s strategy. As announced on 15 February 2018, I will be retiring from the Board on 31 March 2018 and Irene Dorner will succeed me as Chair on 1 April 2018. I am grateful to Norman McLuskie, our Senior Independent Director (SID), for leading such a rigorous process for the Nomination Committee to appoint my successor. An overview of the recruitment process undertaken by the Committee is provided on page 83. As highlighted in my Chair’s Statement, there have been a number of changes to the Board in 2017. Eva Eisenschimmel and Darren Pope joined the Board as Independent Non-Executive Directors in January and March 2017 respectively, and Marilyn Spearing retired from the Board in May 2017. Peter Bole joined the Board as Executive Director in July 2017 and Amy Stirling joined the Board in December 2017 as the Virgin Nominee Director, replacing Gordon McCallum following his retirement from the Board in October 2017. As part of our medium-term Committee succession planning, a number of Committee Chair changes have also been made. On the Committee’s recommendation, Norman McLuskie became Chair of the Remuneration Committee in May 2017; Darren Pope succeeded Norman as Chair of the Audit Committee in July 2017 and Geeta Gopalan succeeded Colin Keogh as Chair of the Board Risk Committee in January 2018 and Colin Keogh became Chair of VMUTM in June 2017. The Committee will continue to keep under review the structure, size and composition of the Board and its Committees and to make appropriate recommendations to the Board. Virgin Money Group Annual Report 2017 I 83 Strategic Report Financial Results
During 2018, the Committee will commission an externally-facilitated evaluation of the Board and Committees’ effectiveness, led by the new Chair. This will offer an independent view of the Board’s effectiveness building upon the progress made against the recommendations and priorities from the 2017 internal Board effectiveness review.
Glen Moreno Chair, Nomination Committee 26 February 2018 Governance
Committee purpose and responsibilities The key activities of the Committee during the year The purpose of the Committee is to keep the Board’s are summarised below. Full details of the Committee’s composition, skills, experience, knowledge, independence responsibilities are set out in the Committee terms of and succession arrangements under review and to review reference which were updated during the year in accordance the succession plans for the Executive. The Committee with best practice and can be found on the website at makes recommendations to the Board to ensure that the virginmoney.com/virgin/investor-relations.
Group’s arrangements are consistent with good corporate During the year the Committee met its key objectives and Risk Management Report governance standards. The Committee’s role also extends carried out its responsibilities effectively, as confirmed by the to appointments to the boards of the Group’s material annual effectiveness review. More details on the Committee subsidiaries, including the Bank. evaluation can be found on pages 78 to 79.
Chair recruitment In 2017, Glen Moreno indicated his intention to retire from the Board in 2018. A process to recruit and appoint a new Chair commenced. The search was undertaken by the Committee and led by myself as the SID. The Chief Executive was fully involved in the process although the decision rested with the Committee. Heidrick & Struggles JCA Group (JCA) was appointed to support the search on the basis of their strength and depth of experience in Chair and Chief Executive searches and their overall market reputation. Aside from assisting with recruitment, JCA has no other connection with the Group.
The specification for the role was agreed by myself, in conjunction with the Chief Executive and Committee members. The Committee and Financial Statements individual Committee representatives had a number of discussions with JCA to scope out the key skills, experience, characteristics and requirements for the role. Key attributes for the position included retail banking or financial services experience, strong corporate governance and/or chair experience, cultural fit and strong stakeholder skills. A structured timetable was adopted for the process and regular Committee discussions and updates held throughout. From a detailed understanding of our requirements and specification for the role, JCA conducted extensive research analysing the market and put together an extensive range of potential candidates for the Committee to consider. After much debate this was narrowed down to a shortlist for interview. These candidates were interviewed by JCA and further due diligence carried out. Shortlisted candidates then met initially with myself and the Chief Executive and also, to ensure consistency, the same Committee members as those involved in the initial discussions with JCA. The Chair’s involvement in the search was limited to meeting the shortlisted candidates, as part of their due diligence. On 25 October 2017, in response to media speculation, we announced that we were in advanced discussions with Irene Dorner. On 15 February 2018, following receipt of regulatory approval, we were delighted to announce Irene’s appointment as Chair Elect with effect from 1 March 2018. Irene will become Chair and Chair of the Nomination Committee on 1 April 2018.
Irene was an ideal match to our requirements with strong and extensive retail banking experience, gathered over 30 years with HSBC. Further Other Information detail is included in Irene’s biography on page 68. We believe Irene is an excellent cultural fit for Virgin Money and we are confident she has the attributes to lead the Board and support the Chief Executive and the Executive as they deliver the next phase of Virgin Money’s strategy. 84 I Virgin Money Group Annual Report 2017
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A comprehensive and structured induction process is under way to ensure Irene has a thorough understanding of our business, the market environment and our stakeholders prior to taking up her appointment as Chair. Further detail on her induction will be provided in our 2018 Annual Report and Accounts.
Norman McLuskie Senior Independent Director
Committee composition, skills and Eva Eisenschimmel and Darren Pope can be found on page 95 experience of the 2016 Annual Report and Accounts. The changes take To ensure a broad representation of independent views, into account the need to refresh the intake of Non-Executive including perspectives from each of the Committees, Directors to bring new and diverse perspectives to the Board membership of the Committee comprises the Board Chair, all and decision-making and ensure appropriate succession Independent Non-Executive Directors and the Virgin Nominee planning for the Committees. Robust and comprehensive Director. The Chief Executive, the Virgin Nominee Director handover processes, as required by the Senior Managers and and, if required, the People Director attend meetings by Certification Regime, were undertaken for each Committee invitation as appropriate. Chair transition. The Chair is responsible for developing a succession plan How the Committee spent its time in 2017 in relation to the Chief Executive, who is in turn primarily Board and Executive succession responsible for developing and maintaining a succession plan for key leadership positions in the Executive. The Committee Approach considers the adequacy of such succession arrangements. The Committee recognises that good succession planning contributes to the delivery of the Group’s strategy by ensuring To support the continued development of the business, the desired mix of skills and experience of Board members the Executive was strengthened by the appointment of now and in the future. Just as importantly, internal talent Ken Donald to the role of Corporate Development Director needs to be recognised and nurtured within Executive and on 1 July 2017. management levels across the Group. The Group’s annual The Board is well placed to meet the challenges and talent and capability reviews and leadership programmes opportunities ahead, and the Committee and the Board are allow the Group to identify talent and have the right satisfied that the Executive is staffed appropriately. The succession plans and development programmes in place Committee will continue to ensure that succession planning to ensure the Group creates opportunities for current and remains under review. future leaders. Effectiveness Process Details of the 2017 Board Effectiveness Review, overseen The Committee supports the Chair in keeping the composition by the Committee, and key recommendations are set out of the Board and its Committees under regular review on pages 78 to 79. The Committee will monitor the Board’s and in leading the appointment process for nominations progress against the agreed roadmap in 2018. to the Board. Independence and time commitments Following the review undertaken by the Chair in 2016 of The independence of the Non-Executive Directors and the Board tenure, succession planning and an assessment of election or re-election of Directors and their suitability to the collective technical and governance skills required from continue in office, were reviewed. As in 2016, a rigorous the Non-Executive Directors to support the future business independence review was undertaken in respect of Norman strategy, the Committee oversaw the Board and Committee McLuskie and Colin Keogh, given that both have just Chair changes that were approved in 2016, and set out on completed the eighth year of their tenure. page 121. Further information on the process for appointing Virgin Money Group Annual Report 2017 I 85 Strategic Report Financial Results
In assessing independence, the Committee did not rely In respect of gender diversity, the Committee approved a solely on the Code criteria but considered whether the revised objective for a balanced Board with representation Non-Executive Director was demonstrably independent and of either gender making up no less than 33% (one in three) free of relationships and other circumstances that could of the Board. In addition, the Group has a stated goal that by affect their judgement. Based on its assessment for 2017, 2020 the Board’s gender balance should be 50/50. Female the Committee is satisfied that, throughout the year, Colin representation on the Board was 40% at 31 December 2017; Keogh, Norman McLuskie, Geeta Gopalan, Eva Eisenschimmel this will increase to 50% representation on the appointment and Darren Pope remained independent as to both character of Irene Dorner to, and Glen Moreno’s retirement from, and judgement. the Board. Amy Stirling is not considered to be independent due to her The Group supports the Women in Finance Charter and the relationship with Virgin. Patrick McCall is also not considered Parker Review ‘Beyond One by ‘21’ recommendation that Governance to be independent since he was appointed to the Board as the FTSE 100 and 250 company boards should have at least representative director of VEL pursuant to the Virgin Money one director which makes the Board composition ethnically Trade Mark Licence Agreement. diverse by 2021 and 2024 respectively. The Board currently The Committee reviewed the roles, including capabilities and meets this minimum recommendation. time commitments, of the Chair, SID, Non-Executive Directors, Please see pages 14 to 15 and 22 to 23 of the Strategic Chief Executive and CFO, considering amongst other matters, Report for details of the Group’s approach to diversity and the impact of limits placed by CRD IV on the number of inclusion initiatives which includes statistics on Board and directorships that can be held by the Directors, and found Executive diversity. Risk Management Report them to be appropriate. The Committee is recommending the re-election of all Directors who served during 2017 and who wish to continue to serve, together with the election of Peter Bole, Amy Stirling and Irene Dorner to shareholders at the 2018 AGM. Diversity The Board places great emphasis on ensuring that its members reflect diversity in its broadest sense. As set out in the Board approved Diversity Policy (available at virginmoney. com/virgin/investor-relations) the Group’s aim is to nurture
a skilled, committed and diverse workforce where every Financial Statements individual, regardless of background, can share the Group’s purpose, reach their potential and be rewarded appropriately for their contribution to the Group’s success. Whilst all Board appointments are made on merit, a diverse combination of demographics, skills, experience, knowledge and background on the Board is important in providing a range of perspectives, insights and challenge needed to support good decision-making. During the course of the year, the Board reviewed the Group’s performance against the Board approved Diversity Policy which sets out the approach to diversity for each of the main Other Information boards within the Group. Information on Board composition as at 31 December 2017 is included on page 65. 86 I Virgin Money Group Annual Report 2017
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Membership and meetings Meetings attended (held) in Independent 20171 Committee Chair Norman McLuskie2 (to July 2017) Yes 7(7) Darren Pope3 (from July 2017) Yes 5(5) “It is the Audit Committee’s role to review the integrity of the Committee members financial statements. A key focus for the Committee during Colin Keogh Yes 7(7) 2017 has been oversight of key accounting judgements and Geeta Gopalan Yes 7(7) the preparations for IFRS 9 implementation”. Eva Eisenschimmel Yes 7(7) Darren Pope Marilyn Spearing4 Yes 2(2) Chair, Audit Committee 1 Number of meetings held during the period the member held office. 2 Norman McLuskie remains a member of the Committee following handover of the Chair to Darren Pope. 3 Darren Pope joined the Committee on 1 March 2017 and was appointed as Chair of the Committee on 21 July 2017. 4 Marilyn Spearing retired from the Committee on 3 May 2017, on her retirement from the Board.
Chair’s overview Having succeeded Norman McLuskie as Chair of the Committee in July 2017, I would like to take this opportunity to thank him for his strong leadership as Chair, his consideration and insight in achieving a smooth transition process and his continuing contribution as a Committee member. I would also like to thank the other Committee members for their contribution and challenge throughout the year. I am pleased to report that, throughout 2017, the Committee continued to focus on its key objectives: overseeing financial reporting, internal controls, whistleblowing, and internal and external audit, as well as specific attention on IFRS 9. Oversight of financial reporting requires an assessment of key accounting judgements and related disclosures. Effective Interest Rate (EIR) accounting methodology and the underlying assumptions, including expected customer behaviour, have remained a key area of focus. The Committee has carefully reviewed and challenged all accounting judgements, as well as ensuring appropriate disclosures have been made that reflect the underlying potential volatility of the EIR method. The Committee also oversaw the IFRS 9 programme delivery, approving the methodology, policies and assumptions that drive the final calculations. Oversight of the Internal Audit function is also a key aspect of the Committee’s role. This has included monitoring of the control framework with particular focus on the Information Technology (IT) control framework and completion of all final recommendations arising from the External Quality Assurance Review (EQAR) undertaken in late 2015. The Committee also oversaw the appointment of a transitional Internal Audit Director and is progressing the recruitment of a permanent replacement. During the year a team from the Financial Reporting Council (FRC) undertook an Audit Quality Review (AQR) inspection of PwC’s audit of the Group’s 2016 financial statements. The Committee satisfied itself that all improvements identified have now been actioned.
Darren Pope Chair, Audit Committee 26 February 2018 Virgin Money Group Annual Report 2017 I 87 Strategic Report Financial Results
Committee purpose and responsibilities Relevant members of the Executive, the Internal Audit The purpose of the Committee is to monitor and review the Director and external auditors attend Committee meetings by Group’s financial reporting arrangements, the effectiveness invitation. During the year, the Committee held a number of of its internal controls and risk management framework, its private Committee sessions, including with the external audit internal and external audit processes and its whistleblowing team (without Executives present) and with each of the Chief procedures. The Committee reports to the Board on its Executive, CFO and the Internal Audit Director. activities and makes recommendations, all of which have been accepted during the year. The key activities of the Committee are set out below and full details of the Committee’s responsibilities are detailed in the Committee terms of reference which can be found at Governance virginmoney.com/virgin/investor-relations. The Committee refreshed its terms of reference in November 2017 to reflect industry guidance on best practice. In 2017, the Committee met its objectives and carried out its responsibilities effectively, as confirmed by the annual effectiveness review detailed on pages 78 to 79. Committee composition, skills and experience Financial Statements Risk Management Report The Committee acts independently of management. This ensures that the interests of shareholders are properly protected in relation to financial reporting and internal control. The Committee now comprises five Independent Non- Executive Directors. Eva Eisenschimmel became a member of the Committee on 25 January 2017. Darren Pope joined the Committee on 1 March 2017 and, on 21 July 2017, as part of the medium term succession plan, took over as Committee Chair from Norman McLuskie who is currently in his ninth year as a Non-Executive Director. Mr McLuskie remains a member of the Committee. Marilyn Spearing retired from the Committee on 3 May 2017, following her retirement from the Board. Each Committee member has extensive experience of banking and financial services, and therefore, as a whole, the Committee has recent and relevant competence in the financial sector. The Chair is a fellow of the Chartered Institute of Certified Accountants and has significant financial experience in the UK listed environment, including formerly as a CFO of a listed bank, enabling him to fulfil the role of Audit Committee Chair for the purposes of the Code. Other Information 88 I Virgin Money Group Annual Report 2017
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How the Committee spent its time in 2017 Financial reporting During 2017, the Committee considered the following key financial issues and judgements in relation to the Group’s financial statements and disclosures, with input from management and the external auditors:
Key issues/judgements in financial reporting Audit Committee review and conclusions Effective interest rate (EIR) The Committee had a number of detailed sessions to review EIR Interest earned on loans and receivables is recognised using the EIR methodology and understand the judgements applied by management, method. including expected future customer behaviours. The application of the EIR method of accounting is judgemental and EIR accounting for unsecured lending remains an area of significant requires management to make a number of assumptions. judgement. During the year, the Committee reviewed management’s view of the current and future expected cash flows and the appropriate modelling period. This was supported by an independent external assessment and report. The Committee concluded that the accounting approach remains appropriate and will be monitored on an ongoing basis. Given the potential future volatility that may be driven by the accounting approach, particular attention has been given to the disclosures relating to EIR which are set out in the Financial Results section and in note 1.10 to the financial statements. Allowance for impairment losses on loans and receivables The Committee considered and challenged the provisioning Determining the appropriateness of impairment losses is judgemental methodology applied by management and the level of provisions. The and requires the Group to make a number of assumptions. Committee considered the calibration of model parameters in the light of economic indicators including house price movements and underlying book performance. Consideration was also given to the appropriateness and use of post model adjustments, which reflect management’s view of the risks in the portfolio not adequately covered by the models due to historically benign macro-economic factors. The Committee was satisfied that the impairment provisions, including management’s judgements, were appropriate. The disclosures relating to impairment provisions are set out in note 1.10 to the financial statements. Capitalisation and impairment of intangible assets Over the course of 2017 a wide range of change projects was delivered Determining the appropriateness of costs that qualify for recognition including a number with significant capital spend, in particular in as intangible assets requires management judgement. Management is relation to digital development, fraud and cyber-crime. also required to make ongoing assessments of whether any assets are As in prior years, the Committee has considered and is satisfied with impaired. the appropriateness of the accounting recognition of these investment costs, including that those costs qualify for recognition as intangible assets in line with the criteria prescribed by accounting standards. The Committee considered management’s reviews for indicators of impairment and oversaw the impairment of a previous software development in light of the strategic decision to consolidate activity within the digital banking programme. No assets were identified as impaired through reviews for indicators of impairment. The disclosures relating to the movement in intangible asset balances during the year are set out in note 1.10 to the financial statements. Virgin Money Group Annual Report 2017 I 89 Strategic Report Financial Results
Key issues/judgements in financial reporting Audit Committee review and conclusions Fair value of financial assets and liabilities The Committee spent time understanding and assessing judgements The Group uses estimates and judgements in the calculation of fair applied (including the use of appropriate market rates) and, following values for assets and liabilities where not all inputs to calculations review, agreed with management’s judgement regarding the are observable in the market, or where there are factors specific to an calculation of fair values. individual instrument that impact fair values. The Committee also reviewed the accounting treatment for the gains on disposal of assets, including treasury instruments and the sale of Vocalink shares. The Committee was satisfied that the accounting treatment was appropriate. The disclosures relating to fair value are set out in note 1.10 to the financial statements. IFRS 9 – Implementation and disclosure The Committee had a number of detailed briefing sessions to Governance IFRS 9 is a significant accounting development which came into effect understand the requirements of this new standard. An impact on 1 January 2018. The standard introduces new accounting policies analysis was conducted to ascertain the changes required and to aid and judgements with the key changes relating to the calculation of the development of the implementation plan which was reviewed and impairment of financial assets on an expected credit loss basis. agreed with the Committee. The Committee also considered the model methodology, accounting assumptions and financial reporting and approved the accounting policies which will be adopted on implementation of IFRS 9. The disclosures relating to the impact of adoption of IFRS 9 are set out in note 37(a) to the financial statements. Going concern and viability The Committee reviewed and challenged the going concern and The Board is required to confirm whether it has a reasonable viability assessment undertaken by management. The assessment was Risk Management Report expectation that the Company and the Group will be able to based on the Group’s capital, funding and strategic plans and included continue to operate and meet their liabilities as they fall due for a consideration of the principal and emerging risks set out on pages 36 to specified period. 39, which could impact the performance of the Group and the liquidity and capital projections over the period. Based on a combination of strong capital and liquidity forecasts, the Committee advised the Board that it was satisfied with the viability statement, and that three years was a suitable period of review. Further details of the viability assessment can be found on pages 120 and 129. Fair, balanced and understandable The Committee reviewed the Annual Report and Accounts and The Group must ensure that the Annual Report and Accounts are fair, challenged management on the presentation of financial and non- balanced and understandable and provide the information necessary financial information. for shareholders to assess the Company’s position and performance, The Committee considered management’s own assessment of business model and strategy. compliance with alternative performance measures guidelines and Financial Statements the fair, balanced and understandable requirements. The Committee concluded that, based on the information provided by management and in its judgement, the Annual Report and Accounts, when taken as a whole, were fair, balanced and understandable.
Internal control and risk management Details of the internal control and risk management systems > continued focus on the IT control environment in light of the in relation to the financial reporting processes are given within increased threat from cyber-crime, incorporating an interim the Corporate Governance Report on page 81 and the Risk audit of the IT control environment by PwC which identified Management Report on pages 126 to 188. Specific matters potential improvements in certain areas. that the Committee considered during the year included: The Committee is satisfied that internal controls over financial
> the effectiveness of systems for internal control, financial reporting and risk management systems were appropriately Other Information reporting and risk management, including a review of all designed and operating effectively. material financial, operational and compliance controls; > the major findings of internal reviews into control weaknesses, fraud or misconduct and management’s response alongside any control deficiencies identified; and 90 I Virgin Money Group Annual Report 2017
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Internal audit External auditors In monitoring the activity, role and effectiveness of The Committee oversaw the relationship with the external the Internal Audit function and its audit programme, auditors. It approved the interim and annual audit plan and the Committee: negotiated and agreed the scope of the auditors’ engagement > oversaw the ongoing process of succession for the Internal (including remuneration), reviewed their audit findings and Audit Director following the departure of the previous role considered management’s responses to such findings and holder during the year. This resulted in the appointment of recommendations. an Interim Internal Audit Director in January 2018, pending The Committee concluded that it was satisfied with recruitment of a permanent Internal Audit Director. The the auditors’ performance and recommends their re- Interim Internal Audit Director has been seconded from appointment by shareholders at the 2018 AGM for the year Deloitte, where he is Head of the Financial Services Internal ending 31 December 2018. The Committee believes the Audit Practice; independence and objectivity of the external auditors and the > oversaw completion of the action plan to address observations effectiveness of the audit process remain strong. from the EQAR of the Internal Audit function carried out in The Committee also considered the continued effectiveness 2015 by Deloitte; of the audit process and the external auditors’ performance > approved the annual audit plan and budget and monitored during the period by means of a questionnaire seeking progress against the plan throughout the year, confirming feedback from Committee members and senior management that appropriate resources and capability were in place to on technical competence, strategic knowledge, quality execute the plan effectively, and considered Internal Audit to control, communication, independence and objectivity. have sufficient standing in the Group; This found the external auditors and the audit process to be both robust and effective. Areas for development included > refreshed the Internal Audit Charter; and provision of greater benchmarking against peer approaches > considered the major findings of Internal Audit and and industry best practice. management’s responses. During the year a team from the FRC undertook an AQR Whistleblowing inspection of PwC’s audit of the Group’s 2016 financial The Committee continued to receive and consider reports statements. On completion of its review in January 2018, the from Internal Audit on the Group’s whistleblowing FRC wrote to the Committee Chair and provided a copy of its arrangements including summaries of reported cases. final report. The Committee discussed the contents of the The Committee was satisfied with the action taken, with report and the actions arising from the review findings with the reports having been considered and approved by the PwC at the January 2018 Committee meeting. The Committee Board’s whistleblowing champion, the Committee Chair. was satisfied that PwC has taken all necessary actions to The Committee also reviewed the Whistleblowing Policy and address the FRC review findings as part of its audit of the 2017 concluded that the policy and procedures in place comply with financial statements. The Chair will meet with the FRC in 2018 the PRA and FCA policy statements on whistleblowing. During to discuss the AQR findings. 2018 the Committee will oversee further enhancements to the Group’s whistleblowing arrangements including improving profile and ease of access. Virgin Money Group Annual Report 2017 I 91 Strategic Report Financial Results
External auditors independence and remuneration for The total amount paid to the external auditors in 2017 non-audit services was £1.6 million of which £0.3 million related to non-audit Both the Board and the external auditors have safeguards services. In 2016 the total paid to the external auditors in place to protect the independence and objectivity of the was £1.2 million of which £0.3 million related to non-audit external auditors. A robust policy is in place to regulate the services. Details of the payments for audit and non-audit use of the auditors for non-audit services which: services provided in 2017 is shown in note 6 to the > details the nature of work that the external auditors may not financial statements. undertake and sets a limit (£25,000) under which permissible External auditors tenure non-audit work may be undertaken without prior permission A formal audit tender process was conducted in 2015, with from the Committee. All other non-audit services are subject PwC appointed as external auditors at the AGM in 2016. The
to prior approval by the Committee; external audit contract will be put out to tender at least every Governance > determines that the overall fee level for non-audit services will ten years. The Committee is satisfied that the Company has continue to be monitored by the Committee and should not complied with the provisions of the Statutory Audit Services exceed 70% of the average audit fee over the prior three year for Large Companies Market Investigation (Mandatory period; and Use of Competitor Tender Processes and Audit Committee Responsibilities) Order 2014, during the financial year under > includes restrictions on the employment of the external review and up to the date of this report. auditors’ former staff to preserve further the independence of the external auditors. Regulatory change The Committee also monitored emerging regulation and ikMngmn eotFinancial Statements Risk Management Report In some cases, the external auditors may be selected over legislation, assessed the impact on the business and oversaw another service provider for a particular engagement due to the development of models, policies and procedures to their detailed knowledge and understanding of the business. comply. Compliance with IFRS 9 was a key area of focus with As an example, in 2017, the Committee considered proposals the Committee holding sessions with the Group finance that PwC be selected to provide non-audit services in relation team and the external auditors to review and discuss the to the assurance work concerning the implementation of requirements of IFRS 9 and the implementation plan to meet IFRS 9 and in the development of the Group’s Covered Bond the Group’s obligations under the revised standard. programme. PwC was considered to be optimal for the role, due to the value and operational synergies brought by its understanding of the Group’s systems, processes and personnel. The provision of the service for these programmes was not considered to have a material effect on the audited financial information nor to impede the auditors’ independence or objectivity, due to the precise scope of the work. The Committee is satisfied that the Group was compliant during the year with both the Code and the FRC’s Ethical and Auditing Standards in respect of the scope and maximum permitted level of fees incurred for non-audit services provided by PwC. Where non-audit work is performed by PwC, both the Group and PwC ensure adherence to robust processes to prevent the objectivity and independence of the auditors from being compromised. Other Information 92 I Virgin Money Group Annual Report 2017
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Membership and meetings Meetings attended (held) in Independent 20171 Committee Chair Geeta Gopalan (from January 2018) Yes 5(5) Colin Keogh2 (to January 2018) Yes 5(5) “The Committee continues to focus on strong risk Committee members management culture as a fundamental part of Norman McLuskie Yes 5(5) achieving our strategic objectives.” Eva Eisenschimmel3 Yes 5(5) Geeta Gopalan Darren Pope4 Yes 3(3) Chair, Board Risk Committee Marilyn Spearing5 Yes 2(2)
1 Number of meetings held during the period the member held office. 2 Colin Keogh remains a Committee member following handover of the Chair to Geeta Gopalan. 3 Eva Eisenschimmel joined the Committee on 25 January 2017. 4 Darren Pope joined the Committee on 1 March 2017. 5 Marilyn Spearing retired from the Committee on 3 May 2017, on her retirement from the Board.
Chair’s overview Having last month succeeded Colin Keogh as Chair of the Committee, I would like to take this opportunity to thank Colin for his strong leadership and judgement and I look forward to his continuing contribution as a Committee member. During 2017, the Board Risk Committee assisted the Board in consideration of all aspects of risk management across the Group, balancing its agenda between existing and emerging risks. The Committee has exercised close oversight of the Group’s asset quality and retail credit risk performance, including detailed discussion on credit card quality and performance with respect to customer behaviour and margins. Whilst the UK economy and housing market remained resilient in 2017, the Committee introduced enhanced monitoring of the macro-economic environment and customer behaviour, to ensure early identification of any emerging risks in these areas. Through the strategic planning round, the Committee supported the work of the Board in re-assessing the Group’s risk appetite, capital and liquidity adequacy and associated stress and scenario testing. This included oversight of the Internal Capital Adequacy Assessment Process (ICAAP) and the Internal Liquidity Adequacy Assessment Process (ILAAP). This also included a review of wholesale funding maturity transformation and refinancing risk. The Committee has monitored the Group’s risk management and governance framework continuing to build on the good progress reported last year around managing risks relating to IT systems, cyber security and financial crime. The Committee has also maintained its emphasis on conduct risk, including the monitoring of outsourcing arrangements and oversight of key strategic programmes, with enhanced reporting on customer outcomes. Focus has also been on maintaining the Group’s risk culture and values throughout the Group, including reviewing and supporting key policy changes and oversight of the risk adjustment elements of Executive incentive schemes. Finally, the Group continues to operate in a regulatory environment which is subject to considerable change and another key area of activity for the Committee has been the monitoring of ongoing developments including the Financial Services Banking Reform Act (ring-fencing), Open Banking, the Second Payment Services Directive (PSD2) and General Data Protection Regulation (GDPR).
Geeta Gopalan Chair, Board Risk Committee 26 February 2018 Virgin Money Group Annual Report 2017 I 93 Strategic Report Financial Results
Committee purpose and responsibilities services and risk management, with particular expertise in The purpose of the Committee is to monitor and review the operational resilience, IT systems, payments, digital and cyber. Group’s compliance with the Board approved risk appetite In addition to relevant members of the Executive, the Internal and risk management framework, and to ensure that the risk Audit Director attends the meetings, by invitation, so that culture is embedded throughout the Group. attendees from all three lines of defence are represented. This includes carrying out the annual review of risk appetite The external auditors also attend meetings as appropriate alongside the strategic plan to reflect the Group’s latest and by invitation. During the year, the Committee held commercial, economic and regulatory views, and considering private sessions with the Chief Risk Officer (without other the statements and risk appetite metrics under each category Executives present). of identified risk. The Committee has oversight of balance Significant risks considered by the sheet risks, including the adequacy of liquidity and capital. Committee Governance The Committee monitors the Group’s risk management Further details of the Group’s principal risks can be found in framework, including policies and methodologies, overseeing the Risk Overview on pages 36 to 39. proposed changes and any actions arising from material How the Committee spent its time in 2017 breaches. Details of the Group’s approach to risk management Over the course of the year, the Committee considered a wide can be found on pages 126 to 188. range of risks facing the Group, both existing and emerging, The Committee reports to the Board on its activities and across all key areas of risk management. As part of the review, makes recommendations, all of which have been accepted certain risks were identified which required further detailed during the year. Full details of the Committee’s responsibilities consideration. A summary of these matters is set out below Financial Statements Risk Management Report are set out in the Committee terms of reference which were and includes the key considerations and conclusions of updated during the year (in accordance with best practice) the Committee. and can be found on the website at virginmoney.com/virgin/ In respect of the Group’s approach to risk management, the investor-relations. Committee also reviewed the capability, resources, remit The Committee is pleased to report that, during the year, and authority levels of the risk function. The Committee the Committee met its objectives and carried out its concluded that the risk function was adequately resourced responsibilities effectively, as confirmed by the annual and continued to be sufficiently independent with appropriate effectiveness review. More details on the Committee authority and standing within the Group. evaluation can be found on pages 78 to 79. Retail credit risk Committee composition, skills and The Committee monitored retail credit risk performance experience against the Group’s risk appetite metrics and policies. The The Committee now comprises five Independent Non- Committee introduced external early warning and key Executive Directors who have a wealth of risk management performance indicators in response to the changing macro- experience across various industries including strong economic outlook and increasing consumer indebtedness in representation in retail banking and financial services. The the UK market as a whole. The Committee also considered the Committee Chair is also a member of the Audit Committee. risk of adverse change in customer behaviour and its potential resultant impact on impairment losses. Whilst the Group is Eva Eisenschimmel and Darren Pope became members of the not exposed to the unsecured personal loan or motor finance Committee on 25 January 2017 and 1 March 2017 respectively. market, the Committee monitored the quality of the Group’s Marilyn Spearing retired from the Committee on 3 May 2017, credit card lending which has remained strong. In response following her retirement from the Board. to the changing macroeconomic outlook, the Committee As part of the medium term succession plan, and following oversaw further tightening of lending criteria in the first half Other Information an orderly transition, Geeta Gopalan took over as the Chair of 2017. This will remain an area of focus in 2018. in January 2018. Colin Keogh, who is in his eighth year as a Non-Executive Director, remains a member of the Committee. Geeta has been a member of the Committee since June 2015 and has a strong background and experience in financial 94 I Virgin Money Group Annual Report 2017
Corporate Governance Report
Board Risk Committee Report
Market risk Funding and liquidity risk The Committee monitored and reviewed monthly interest The Group Treasurer provided regular updates on balance rate risk positions against risk appetite metrics and policies. sheet management. The Committee challenged the current Additional scenario planning and stress testing was also and forecast funding and liquidity positions, and considered undertaken to inform the Group’s strategic planning and reports on funding sources (including retail deposits, TFS, assist in the management of capital at risk driven by base RMBS and the establishment of a Covered Bonds programme) rate changes. to ensure a prudent mix is maintained within risk appetite
Operational risk and policy limits. This included a particular focus on maturity Regular updates across all aspects of operational risk were transformation and refinancing risk of maturing funding considered by the Committee, including financial crime, schemes, and review of the funding plans carefully structured incident management, outsourcing management and security to avoid undue refinancing risk. infrastructure. The Committee continued to oversee the Capital delivery of the Group information security programme with The Committee considered the quality of the capital base a particular focus on cyber resilience strategy to mitigate and the projected capital resources to ensure that the Group the threat of cyber-attack. In particular, the Committee was complies with current regulatory capital requirements, is pleased to note the progress made in the year to improve within the risk appetite set by the Board and is well positioned financial crime capability. to meet future requirements. The Committee reviewed and
Conduct risk and compliance challenged management’s development of scenario planning The Committee considered reports on the proactive and stress testing as part of its assessment of the regulatory identification and resolution of conduct related activity. In capital requirements and preparation of the ICAAP and addition, the Committee considered developments in the Recovery and Resolution Plan (RRP). Further details on stress Group’s conduct culture and reports on complaints and testing can be found within the Risk Management Report on product governance. The Committee also monitored risks page 129. The Committee concluded that the Group’s capital inherent in major outsource arrangements and received remained well above minimum regulatory requirements and regular updates on their performance and resilience. Where within the risk appetite set by the Board. deficiencies in operation and/or performance were identified, Emerging risks the Committee increased the focus to ensure resolution Emerging risks are those which have the potential to increase was prioritised. Compliance matters were also monitored, in significance and affect the performance of the Group. including the oversight of the FCA’s Client Asset Sourcebook Further details can be found in the Risk Management Report (CASS) regulatory attestation exercises and CASS remediation on pages 130 to 131. in the investment business. The Committee oversaw the Group’s contingency planning Strategic and financial risk designed to respond to and mitigate the impact of adverse The Committee undertook a review of the risks inherent in macro-economic conditions. the strategic plan and provided input and support on their Risks arising from the implementation of Financial Services mitigation and management. The quality of lending and credit Banking Reform Act 2013 (which will require the ring-fencing concentration risk is reviewed regularly against risk appetite of retail banking operations) have also been considered, metrics and challenged by the Committee. The quality of ensuring forward planning is undertaken to address any new lending, the credit performance of the portfolio and risk anticipated risks in implementation and compliance. adjusted returns were reviewed by the Committee resulting The Committee concluded that it was satisfied with the in it recommending changes to Group policy or risk appetite implementation to ensure compliance by January 2019. to manage exposures and balance risk/reward in these areas. The Committee also introduced additional monitoring of the Minimum Requirement for Own Funds and Eligible Liabilities performance against the assumed behaviours of the credit (MREL) will be phased in by January 2022. The Committee card portfolio as that book matures. monitored the Group’s approach and the guidance was fully reflected in the strategic planning process with the Committee’s input. Virgin Money Group Annual Report 2017 I 95 Strategic Report Directors’ Remuneration Report
Statement by the Chair of the Remuneration Committee Financial Results
Dear Shareholder, The performance period for the 2015 Long Term Incentive On behalf of the Board and as Chair of the Remuneration Plan (“LTIP”), the first such award granted following Committee I am pleased to present the Directors’ the Group’s admission to the stock market, ended on Remuneration Report for the year ending 31 December 2017. 31 December 2017. Based on the achievement of performance targets 65.3% of the shares under award will vest. I was appointed as Committee Chair on 3 May 2017 having been a member of the Committee since 2010. I would like This outcome is a reflection of the Group’s delivery against the to take this opportunity to thank Marilyn Spearing for her growth, quality and returns targets set out in 2015 following previous leadership of the Committee as well as her support the Initial Public Offering (IPO). The Committee is satisfied during the transfer of Chair responsibilities. these performance conditions have remained relevant and appropriate throughout the performance period.
The Committee was strengthened this year with the Governance appointment of Eva Eisenschimmel and Darren Pope who have Measure Weighting Outcome already made significant contributions to the Committee’s Growth 30% 19.1% work. Eva and Darren also joined Geeta Gopalan and me Quality 20% 20.0% as members of the Board Risk Committee ensuring strong alignment between risk and remuneration. Returns 30% 11.2% Corporate Scorecard 20% 15.0% In July 2017 Peter Bole, the Chief Financial Officer, was appointed to the Board. This report will therefore include 100% 65.3% his remuneration arrangements and share interests
Vested awards under the 2015 LTIP are delivered in shares and Risk Management Report from that date. will be released in three equal instalments up until 2020. 2017 Executive Director outcomes In March 2017 new share awards were granted to the Chief The performance of the Group in 2017 in a challenging Executive and the Chief Financial Officer under the 2017 LTIP external environment once again reflects strong delivery based on 100% of fixed pay. against the objectives set for the year. Executive Directors continue to have the majority of their The Committee has determined annual bonus outcomes variable pay delivered in Virgin Money share awards (80% for based on the financial and non-financial targets set at the 2017), maintaining the strong alignment with the long-term beginning of the year. Details of performance against these performance of the Group and shareholder interests. targets are disclosed on page 108 of this report. 2018 LTIP performance measures Annual Bonus awards for 2017 are 95.2% of maximum for the The Committee will continue to operate within the current
Chief Executive and 91.7% of maximum for the Chief Financial Financial Statements approved Directors’ Remuneration Policy in 2018. However, Officer reflecting the strong performance of the Group to ensure our remuneration approach remains aligned to our within the year. strategy, we will be making changes to the LTIP performance These awards will be subject to our deferral policy which was measures for 2018 awards. We have finalised these proposals reviewed during the year following a clarification of regulatory after reflecting on feedback from major shareholders. expectations and practice by other large UK banks. Therefore, The recent refresh of Group strategy highlighted two key for 2017 bonuses, 80% will be paid upfront (half in cash, half strategic developments: the build of the digital bank and entry in shares) with the remaining 20% delivered in share awards into the Small and Medium Enterprise (SME) market. Given deferred for between three and seven years. Bonus awards the importance of these initiatives to shareholder value, the delivered in shares will be subject to a 12-month hold period. 2018 LTIP award is being rebalanced to ensure that sufficient This approach continues to provide significant alignment focus is placed on both the continued performance of the core between Executive Director and shareholder interests over an business and the delivery of the strategic initiatives. Other Information extended deferral period, and remains in line with regulatory requirements. 96 I Virgin Money Group Annual Report 2017
Directors’ Remuneration Report
2018 fixed pay 2018 policy review and consideration of shareholders’ After careful consideration the Committee has determined views that the Chief Executive will receive an increase in base salary The current remuneration policy will reach the end of its of 2.6% to £800,000 for 2018. The Chief Financial Officer’s three-year term at our 2019 AGM. During 2018 the Committee salary will remain unchanged, however, he will receive an will therefore consider if any changes to the Policy are allowance of £100,000 in recognition of the additional required ahead of a new binding shareholder vote in 2019. responsibilities accompanying his appointment to the Board. As part of this process we will engage with shareholders to Taking account of his current shareholding, this will be ensure their views are taken into consideration. delivered in shares. Shareholder views relating to remuneration are an important Considerations for other colleagues part of the Committee’s discussions. Having engaged with The remuneration of colleagues across the Group is a key a number of the Company’s largest shareholders recently, consideration when determining Executive Director outcomes. I am confident that the approach outlined is aligned to the The average colleague salary will increase in the forthcoming interests of all shareholders. pay round by 1.9%, with the highest performers receiving an I am pleased to recommend this statement and the 2017 increase of up to 6%. Remuneration Implementation Report on page 103 to The Group continues to pay all staff above the National Living shareholders, ahead of the 2018 AGM. Wage which is in excess of the National Minimum Wage. During 2018 the Group will apply to become a Living Wage Accredited employer. The Committee is mindful of the proposed changes to the Corporate Governance Code. During the course of 2018 it will review how effective engagement with colleagues and across Norman McLuskie all stakeholders is maintained. Chair, Remuneration Committee 26 February 2018 Virgin Money Group Annual Report 2017 I 97 Strategic Report
Directors’ Remuneration Policy – abridged Financial Results
Directors’ Remuneration Policy and Principles The current Directors’ Remuneration Policy was formally > the Group aims to treat its colleagues in the same way that it approved by shareholders at the AGM on 4 May 2016. It is serves customers – with honesty, transparency and fairness. intended that approval of the Remuneration Policy will be Virgin Money believes in creating a culture where customer sought at three-yearly intervals, unless amendments to the service is the priority. To achieve this, all colleagues receive policy are required in the interim, in which case appropriate an annual bonus opportunity, with no product-focused sales shareholder approval will be sought. incentives in place. Balanced objectives are used to assess The full policy is set out on pages 112 to 121 of the 2015 annual performance; and Annual Report and Accounts which is available at: http:// > to ensure the approach to senior remuneration is fair, uk.virginmoney.com/virgin/investor-relations/results-and- competitive and supportive of the Group’s strategy, Virgin presentations/. For ease of reference, the remuneration policy Money undertakes annual reviews of its remuneration Governance tables for Executives and Non-Executive Directors from the approach. This also ensures that the Group’s position remains policy are included in the following pages. appropriate relative to competitors. Information on how the policy will be applied in 2018 is Virgin Money aims to support colleagues and their families included on pages 105 and 106 of the Implementation Report. whilst enabling them to plan for the future through a As set out in the previous Directors’ Remuneration Reports, competitive benefits package. The benefits package helps the Group seeks to reward colleagues fairly for their ensure low staff turnover, higher engagement and supports contribution, whilst ensuring they are always motivated the Group’s overall operational and financial efficiency. to deliver the best outcomes for stakeholders. To achieve Risk Management Report this, colleagues are rewarded in line with UK listed financial services sector best practice, with no reward for inappropriate risk taking. The Group’s approach to remuneration for all colleagues, including Executive Directors, is designed to promote the long term success of Virgin Money for customers, corporate partners, shareholders and wider society. This reflects the culture and supports the delivery of the business strategy: > to maintain capacity for growth, Virgin Money ensures it remains competitive in the financial services market through
regular market reviews. The Group’s remuneration strategy Financial Statements aims to motivate individual out-performance against transparent and challenging objectives that are rigorously applied; > to ensure an appropriate approach to remuneration, and in particular variable pay, clear risk principles are applied which aim to drive sustainable growth. Risk considerations are a material factor in the determination of pay. Malus adjustments and clawback apply to all variable pay; Other Information 98 I Virgin Money Group Annual Report 2017
Directors’ Remuneration Report
Summary of Remuneration Policy for Executive Directors Base salary Purpose and link to strategy Base salary reflects the role of the individual taking account of responsibilities and experience. Operation Base salaries are normally reviewed annually. When determining and reviewing base salaries, the Committee considers: > corporate and individual performance; > the skills, experience and responsibilities of the Executive Director and their market value; > the scope and size of the role; > base salary increases for colleagues throughout the Group; and > external market factors. Maximum potential Whilst there is no maximum base salary, any salary increases in percentage terms will normally be in line with increases awarded to other colleagues, but may be higher in certain circumstances. The circumstances may include but are not limited to: > where a new Executive Director has been appointed at a lower salary, higher increases may be awarded over an initial period as the Executive Director gains experience in the role; > where there has been an increase in the scope or responsibility of an Executive Director’s role; or > where a salary has fallen significantly below market positioning given current size and scale of the Group. Base salary levels may be amended to take into account any regulatory changes. Performance measures N/A
Fixed Allowance Purpose and link to strategy To ensure that total fixed remuneration is commensurate with the role and to provide a competitive reward package for Executive Directors with an appropriate balance of fixed and variable remuneration. Also to facilitate recruitment of an Executive Director if required. Operation The Fixed Allowance will be delivered in cash and /or shares normally on a monthly basis. The Fixed Allowance is not pensionable. Maximum potential The maximum allowance is 100% of base salary. Performance measures N/A
Pension Purpose and link to strategy To support the Executive Directors in building long-term retirement savings in a manner which does not expose the Group to any unacceptable financial risk. Operation Executive Directors are eligible to participate in the Group’s defined contribution pension scheme. Alternatively, Virgin Money may make contributions to an Executive Director’s personal pension arrangement. Only base salary is pensionable. An individual may elect, with the Group’s consent, to receive some or all of their pension contribution as a cash allowance. Maximum potential The maximum allowance for Executive Directors is 30% of base salary. Performance measures N/A Virgin Money Group Annual Report 2017 I 99 Strategic Report Financial Results
Benefits Purpose and link to strategy To provide a competitive and cost effective flexible package delivered in a way which does not expose the Group to any unacceptable financial risk. Operation Virgin Money provides a range of benefits which may include private medical insurance, permanent health insurance and life assurance. The Committee retains the discretion to provide additional benefits as may be reasonably required. These may include national and international relocation benefits such as (but not limited to) accommodation, family relocation support and travel. The Executive Directors are entitled to a maximum of 30 days’ holiday and any unused holiday may be bought back at the standard daily salary rate.
Maximum potential The maximum value of benefits is based on the cost to the Group of providing each of the benefits in Governance the ‘Operation’ section immediately above. Performance measures N/A
Annual Bonus and Deferred Bonus Share Plan Purpose and link to strategy The annual bonus is designed to reward performance, scored against annual weighted financial and non-financial measures. Operation Annual bonuses are discretionary and are based on Group and individual performance within the year. The determination of measures and their weighting are set annually and awards are determined
by the Remuneration Committee at the end of the financial year. Risk Management Report The Committee has discretion, in exceptional circumstances, to amend targets, measures, or number of shares under award if an event happens (for example a major transaction or capital raising) that in the opinion of the Committee, causes the annual targets or measures to no longer be appropriate or such adjustment to be reasonable. The Committee also has the discretion to reduce the vesting level of any award if it deems that the outcome is not consistent with performance delivered. The annual bonus may be delivered partly in cash and partly deferred into cash, shares or other instruments. The mechanism for making the bonus deferral is the Deferred Bonus Share Plan (DBSP). Deferral levels are set at the time of award and in line with regulatory requirements. At present this means that at least 60% of total variable pay is deferred, at least 50% of variable pay is paid in shares or other instruments, and vested shares (post taxation) are subject to a retention period. The deferral and holding periods may be amended to take into account any regulatory changes over the life of the policy. The Remuneration Committee may adjust awards or amend the terms of the awards in accordance with the DBSP rules. Financial Statements At the time of the shares being released and as long as this remains permissible under the regulatory rules, Executive Directors may receive an amount (in cash or in shares) equal to the dividends paid or payable between the date of grant and the vesting of the award on the number of shares which have vested. All awards will be subject to malus and clawback provisions. Maximum potential The normal maximum bonus for Executive Directors is 100% of fixed pay. Under the DBSP rules, there is scope to award a bonus up to 300% of total fixed remuneration in exceptional circumstances, normally linked with recruitment. Any such Award would however remain subject to the overall regulatory rules. Performance measures Performance measures are determined by the Remuneration Committee each year. At least 50% of the annual bonus opportunity is based on performance against key financial measures determined at the beginning of each financial year. The remainder of the annual bonus is Other Information based on performance against non-financial measures, which will normally include a scorecard of brand, culture, control measures and personal strategic objectives. 100 I Virgin Money Group Annual Report 2017
Directors’ Remuneration Report
Long Term Incentive Plan (LTIP) Purpose and link to strategy The plan is designed to reward delivery of the Group’s strategy and growth in shareholder value over a multi-year period and aligns senior colleagues’ interests with those of shareholders. Operation Awards are granted in the form of nil cost options or conditional shares, subject to performance conditions aligned to long-term strategy. The Committee has discretion, in exceptional circumstances, to amend targets, measures, or number of shares under award if an event happens (for example a major transaction or capital raising) that in the opinion of the Committee, causes the targets or measures to no longer be appropriate or such adjustment to be reasonable. The Committee also has the discretion to reduce the vesting level of any award if it deems that the outcome is not consistent with performance delivered. Performance conditions will normally be tested over a period of three financial years. Deferral terms are set at the time of award and in line with regulatory requirements. Vested shares (post taxation) will be subject to a holding period. The performance, vesting and holding periods may be amended to take into account any regulatory changes over the life of the policy. At the time of the shares being released and as long as this remains permissible under regulatory rules, Executive Directors may receive an amount (in cash or in shares) equal to the dividends paid or payable between the date of grant and the vesting of the award on the number of shares which have vested. All awards will be subject to malus and clawback provisions. Maximum potential The normal maximum award for Executive Directors is 100% of fixed pay. There is scope to increase awards up to 300% of total fixed remuneration in exceptional circumstances, normally linked with recruitment. Any such award would remain subject to the overall regulatory rules. Performance measures Performance measures are determined by the Remuneration Committee each year.
All-colleague plans Purpose and link to strategy If operated in the future, Executive Directors will be eligible to participate in HMRC approved all-colleague schemes which encourage share ownership, as approved by shareholders. Operation Executive Directors may participate in these plans if operated in the future in line with the prevailing HMRC guidelines (where relevant), on the same basis as other eligible employees. Maximum potential Participation levels will be in line with HMRC limits as amended from time to time. Performance measures N/A Virgin Money Group Annual Report 2017 I 101 Strategic Report Financial Results
Legacy awards and restrictions on payments Colleague remuneration and engagement The Remuneration Committee reserves the right to honour When reviewing and setting Executive Director remuneration, any remuneration payments or awards and any payments or the Remuneration Committee takes into account the pay awards for loss of office, notwithstanding that they are not and employment conditions of all colleagues. Specifically, in line with the policy set out above where the terms of the the level of any Group-wide pay review is a key determinant payment or award were agreed before the policy came into when setting the level of any increase to Executive Directors’ effect (as set out in the 2014 Directors’ Remuneration Policy salaries. Discussion on the Group’s approach to remuneration or the Listing Prospectus where relevant). Such payments and relevant colleague reward matters takes place with union or awards are set out in the Implementation Report for the representatives during the annual pay review cycle. relevant year. This includes payments in relation to legacy There is no colleague representative on the Remuneration deferred bonus awards and long-term incentive awards Committee. Instead, time is taken to meet and listen to the Governance and share options (including exceptional awards vesting views of many colleagues. One of the duties of the People on the listing of the Company) granted prior to listing Director is to brief the Board on colleague views and, as a of the Company. regular invitee to Remuneration Committee meetings, he Service Agreements ensures that decisions are made with appropriate insight to The notice period and date of the current Executive Directors’ colleagues’ views. service agreements are shown below: Colleague engagement is a measure within the scorecards for both the annual bonus and the LTIP. The structure of the Date of service
Notice period agreement Executive Directors’ remuneration packages cascades down Risk Management Report to other colleagues. Particular points to note are: Jayne-Anne Gadhia 12 months 18 November 2014 Peter Bole 12 months 1 November 2016 > LTIP awards are granted to the wider Virgin Money Executive Team; The Group policy is that the Chair will normally have a six- > all colleagues are eligible to participate in an annual bonus month notice period, to be served by either party. arrangement, with no product-focused sales incentives. Instead, all bonuses are subject to a balanced scorecard of measures with particular emphasis on customer experience; and > colleagues in certain roles may receive a fixed allowance where this is considered appropriate taking into account
pre-determined criteria. Financial Statements Other Information 102 I Virgin Money Group Annual Report 2017
Directors’ Remuneration Report
Chair and Non-Executive Director fees in 2018 Purpose and link to strategy To ensure the Group is able to engage and retain highly skilled and experienced individuals who can provide a valuable contribution, having a significant range and depth of expertise. Operation Fees payable to the Chair are determined by the Remuneration Committee, whilst the fees paid to the Non-Executive Directors are set by the Board. The Board undertakes periodic reviews, at least annually, of Non-Executive Director fees and this may lead to fee increases. The fees are set at a rate that reflects the individual’s experience, value to the Group and the expected time commitment of them. The regulatory regime and the practical aspects of running a complex financial services company are important inputs to remuneration decisions. For the Non-Executive Directors, there is a base fee which is then supplemented by additional fees in respect of chairing and being a member of Board committees. Incremental fees will be paid for additional duties and time commitment, such as those of the Senior Independent Director. The current fees are set out on page 106. From time to time, new Board Committees may be established and/or responsibilities distributed between Committees, at which point fees for Committee membership and Chairmanship may be reviewed. The Chair and Non-Executive Directors are reimbursed for expenses (grossed-up where taxable) incurred in performing their duties. For individuals based outside of the UK this will include travel to and from the UK. The Chair has access to a vehicle for personal use, which is a taxable benefit, and may be offered access to private medical insurance. Maximum limit The maximum aggregate value of fees payable to the Chair and the Non-Executive Directors is capped at £2 million under the Articles of Association. Performance metrics No remuneration payable to the Chair and the Non-Executive Directors has performance conditions. Virgin Money Group Annual Report 2017 I 103 Strategic Report
Implementation Report Financial Results
Purpose and membership of the Remuneration Committee The primary role of the Remuneration Committee is to determine and recommend to the Board a fair and responsive remuneration framework to ensure that the Group’s most senior Executives are appropriately rewarded and incentivised for their contribution to the Group’s performance. The Remuneration Committee’s primary purpose is to formulate policies that ensure a clear link between reward and performance and are compliant with regulatory requirements. The Committee reports to the Board on its activities and makes recommendations, where required, all of which have been accepted during the year. Full details of the Committee’s responsibilities are set out in the Committee terms of reference which can be found on our website at virginmoney.com/virgin/investor-relations.
In 2017 the Committee met its objectives and carried out its responsibilities effectively as confirmed by the annual effectiveness Governance review. More details on the Committee evaluation can be found on pages 78 and 79. Remuneration Committee membership in 2017 Norman McLuskie Independent member Joined 27 January 2010 (and Chair from 3 May 2017) Marilyn Spearing Independent member Joined 29 January 2014, Chair from 1 January 2016 to 3 May 2017 on which date she retired from the Board and the Committee Geeta Gopalan Independent member Joined 25 June 2015 Eva Eisenschimmel Independent member Joined 25 January 2017 Risk Management Report Darren Pope Independent member Joined 1 March 2017
Other attendees (by invitation from time to time) included: the Chair, the Chief Executive, the People Director, and the Reward Director. To manage potential conflicts of interest, those four individuals did not attend at times when their own remuneration outcome was discussed and approved. Deloitte (the Committee’s independent consultants in relation to Directors’ remuneration) and a Virgin NED also attended meetings where invited. The Company Secretary attended meetings to record minutes and advise on governance matters. The Group manages the link between risk and remuneration carefully and all current members of the Remuneration Committee are also members of the Board Risk Committee. In addition, representatives from the Risk function may attend meetings where appropriate. In advance of a share award vesting or a bonus being awarded, the Chief Risk Officer provides the Remuneration Committee with a detailed risk assessment. This is also considered separately by the Board Risk Committee. Financial Statements Other Information 104 I Virgin Money Group Annual Report 2017
Directors’ Remuneration Report
Remuneration Committee activity in 2017 There were four meetings of the Remuneration Committee during 2017. The key matters were as follows:
Date Pay / bonus Policy / Governance Q1 > 2016 pay and bonus outcomes > 2016 Directors’ Remuneration Report and Pillar 3 > Performance conditions for the 2017 Annual Bonus and LTIP > 2016 PRA Remuneration Policy Statement > Release of deferred bonus awards > Review of Committee Terms of Reference > Review of Group-wide Remuneration Policy Q2 > Release of shares vesting under Buy-out Award Q3 > Market update > Material Risk Taker population for 2017 > 2017 PRA Remuneration Policy Statement Q4 > Release of Executive awards vesting under the IPO Share > Living Wage Accreditation Award > 2017 Directors’ Remuneration Report > Review of performance measures for the 2018 Annual Bonus > Remuneration Committee Terms of Reference and LTIP > Determination of Group-wide pay and bonus budgets > Review of deferral approach for 2018
Advisors to the Remuneration Committee The Remuneration Committee took external advice from Deloitte, the Committee’s independent consultants in relation to Directors’ remuneration. Deloitte’s appointment as consultants was made by the Remuneration Committee. Deloitte are members of the Remuneration Consultants Group and comply with the professional body’s code of conduct. This supports the Remuneration Committee’s view that the advice received was objective and independent. Deloitte’s fees in 2017 amounted to £52,350. Deloitte also provide co-sourced internal audit services. Deloitte do not have any other connection with the Group.
Statement of voting at Annual General Meeting The Group’s remuneration policy, which was effective during 2017, was detailed within the Directors’ Remuneration Report for 2015 and voted on at the 2016 AGM. The remuneration awarded to the Executive Directors in 2016 was disclosed in last year’s Remuneration Implementation Report and was voted on at the 2017 AGM. The shareholder votes submitted at the meetings, either directly, by mail or by proxy, were as follows:
Votes in favour Votes against Votes withheld Number of Percentage of Number of Percentage of Number of shares votes cast shares votes cast shares Remuneration Policy (2016 AGM) 349,102,101 91.79% 31,219,817 8.21% 83,374 Remuneration Implementation Report 353,955,397 98.86% 4,083,364 1.14% 4,084,068 (2017 AGM) Virgin Money Group Annual Report 2017 I 105 Strategic Report Financial Results
Implementation of the policy in 2018 The following sets out how the Directors’ Remuneration Policy will be applied in 2018: Fixed Pay Base salary Jayne-Anne Gadhia (Chief Executive): £800,000 Peter Bole (Chief Financial Officer): £500,000 Fixed Allowance Jayne-Anne Gadhia (Chief Executive): £100,000 (paid in cash) Peter Bole (Chief Financial Officer): £100,000 (paid in shares) Pension and other benefits Jayne-Anne Gadhia (Chief Executive): 30% of base salary. Peter Bole (Chief Financial Officer): 20% of base salary. Governance Annual Bonus Opportunity Maximum annual bonus opportunity is 100% of fixed pay. Deferral terms For the 2018 performance year, annual bonus opportunity will be awarded in a combination of cash and shares. Deferral will be consistent with regulatory requirements. Any shares released are subject to a further holding period in line with regulatory requirements and market practice. Deferred share awards will not receive dividends or dividend equivalents. Performance measures and targets The Remuneration Committee has determined that for 2018 the annual bonus will be based on:
> financial measures (underlying profit before tax) – 50% weighting Risk Management Report > non-financial measures (personal strategic objectives and a series of risk, brand, culture and control measures) – 50% weighting. The Board considers the targets that apply to these measures to be commercially sensitive at this time but will provide information on the targets alongside the level of payout relative to the performance achieved in next year’s Implementation Report. The Remuneration Committee has determined that 60% vesting is justified for target performance and 0% is justified for threshold performance. All awards will be subject to malus and clawback provisions.
Long Term Incentive Plan Opportunity LTIP awards in 2018 will be granted over shares worth 100% of fixed pay. Vesting terms The performance period will be the three years commencing on 1 January 2018. An assessment Financial Statements of performance in the financial year preceding the date of grant will be taken into account before awards are made. The intended date of grant is March 2018. To the extent that the performance measures are satisfied, awards will vest equally from the fourth anniversary of the date of grant to the eighth such anniversary. At each vesting date the resultant number of shares (post taxation) will be subject to a further holding period in line with regulatory requirements and market practice. LTIP awards will not receive dividends or dividend equivalents. Performance measures and targets The Remuneration Committee has chosen performance measures that are based on delivering the Company’s strategic objectives, and the continued creation of shareholder value. This choice and the calibration of the targets is consistent with the strategic plan. The Remuneration Committee has determined that 80% vesting is justified for target performance and 20% is justified for threshold performance. Performance against the targets will be subject to a risk assessment review.
The following table outlines the weightings and measures for the 2018 awards. Other Information All awards will be subject to malus and clawback provisions. 106 I Virgin Money Group Annual Report 2017
Directors’ Remuneration Report
FY18 LTIP Performance Measures Measure Target Weighting Underlying basic earnings per share Threshold: 35p 30% Maximum: 46p Return on tangible equity Threshold: 10% 30% Maximum: 13% Scorecard – relative to business strategy and a) Strategic delivery 40% external comparators (including digital bank and SME) b) Customers (Advocacy) c) Customers (Complaints) d) Colleagues (Engagement)
Outcomes will be disclosed on a retrospective basis after the end of the three-year performance period.
Chair and Non-Executive Director fees in 2018 The annual fees for the Chair and Non-Executive Directors are unchanged to that specified in the 2016 Annual Report. A review of the Chair fee was carried out in 2017 and a review of the Non-Executive Director fees was carried out in early 2018.
2018 fee policy 2018 2017 Chair fee1 £350,000 £350,000 Non-Executive Director basic fee £80,000 £80,000 Senior Independent Directorship £20,000 £20,000 Chair of Audit Committee £25,000 £25,000 Chair of Remuneration Committee £25,000 £25,000 Chair of Board Risk Committee £25,000 £25,000 Chair of Nomination Committee N/A N/A Audit Committee Membership £10,000 £10,000 Remuneration Committee Membership £10,000 £10,000 Board Risk Committee Membership £10,000 £10,000 Nomination Committee Membership N/A N/A
1 The Chair has access to a vehicle for personal use, which is a taxable benefit and is offered access to the Group’s private medical insurance scheme which he has accepted and chosen to personally fund. Non-Executive Directors may receive more than one of the above fees. During 2018, Colin Keogh will be appointed as Chair of the Board of Virgin Money Unit Trust Management (VMUTM), a regulated subsidiary of Virgin Money Holdings (UK) plc. In line with this Remuneration Policy, Mr Keogh will receive a Non-Executive Director fee of £15,000 to take account of this additional responsibility. Virgin Money Group Annual Report 2017 I 107 Strategic Report Financial Results
Remuneration outcome for 2017 Executive Directors (audited) The following table summarises the total remuneration awarded in relation to Executive Directors’ services during 2017. In respect of the Chief Financial Officer, the figures relate to the period from appointment to the Board on 25 July 2017.
Jayne-Anne Gadhia Peter Bole
2017 2016 Income from 2017 2016 25 July – £’000 £’000 31 December £’000 £’000 Salary 780 750 219 –
Fixed Allowance 100 100 – – Governance Taxable benefits5 1 1 – – Pension allowance 234 225 44 – Total fixed 1,115 1,076 2632 – Bonus 1,060 1,000 2413 – LTIP 5126 N/A N/A – Other N/A N/A 2824 – Total remuneration 2,6871 2,076 786 – Risk Management Report
1 The Chief Executive’s total remuneration has increased year-on-year by 29% in 2017. 84% of this increase is attributable to first vesting of share awards made under the LTIP scheme granted in 2015 but where performance conditions ended on 31 December 2017. 2 The Chief Financial Officer became an Executive Director on 25 July 2017. The figures shown for fixed remuneration in 2017 are pro-rated for the period 25 July 2017 to 31 December 2017. 3 Figure represents the proportion of the bonus award for 2017 that relates to duties performed as an Executive Director. 4 ‘Other’ relates to the element of the Chief Financial Officer’s buy-out award, granted in 2016 prior to his appointment as an Executive Director. This award was subject to performance conditions that ended on 31 December 2017. The average share price between 1 October 2017 and 31 December 2017 (281.2p) has been used to indicate the value. 5 Taxable benefits consist of Private Medical Insurance (Chief Executive: £715; Chief Financial Officer: £124). 6 The 2015 LTIP vesting outcome was confirmed by the Remuneration Committee at its meeting on 21 February 2018. The average share price between 1 October 2017 and 31 December 2017 (281.2p) has been used to indicate the value. The shares were awarded in 2015 based on a share price of 409p. Financial Statements Other Information 108 I Virgin Money Group Annual Report 2017
Directors’ Remuneration Report
Variable Awards Annual Bonus For 2017, Executive Directors had a maximum annual bonus opportunity of 100% of fixed pay. The Executive Directors’ 2017 annual bonus determination was based on performance against: > financial measures (50% of overall award): underlying profit before tax; > risk, brand, culture, control objectives (25% of overall award): based on performance against objectives from the Group’s corporate scorecard; and > personal strategic objectives (25% of overall award): based on performance against pre-determined personal strategic objectives. Actual performance against the 2017 bonus targets was as follows (audited):
Chief Executive Chief Financial Officer
Weighting Weighting Performance Threshold Target Maximum Actual at Bonus at Bonus measure (0%) (60%) (100%) performance maximum score maximum score Underlying profit £213.3m £231m £277m £273.3m 50% 48.9% 50% 48.9% before tax Risk & Corporate as explained below 25% 21.3% 25% 21.3% Scorecard Personal strategic as explained below 25% 25% 25% 21.5% objectives Total bonus 100% 95.2% 100% 91.7%
Risk, Brand, Culture and Control Scorecard Personal strategic objectives (25% weighting) (25% weighting) Jayne-Anne Gadhia > enhanced customer satisfaction and advocacy with position > Updated long-term strategy agreed with the Board and as one of the leading UK banks for customer satisfaction communicated to the market, including entry to the SME maintained; market and ground breaking digital bank proposition; > improvement in intermediary relationships reflected in > Delivered financial targets set out at IPO and in the annual increased Net Promoter Score to +40; plan, in particular a RoTE of 14%; > progress to achieving the aim of 50%/50% gender balance by > Efficiency improved with a cost:income ratio of less than 50% 2020, with women in senior leadership roles increasing from in Q4 2017; 22% to 29%; > Profit attributable to shareholders increased by 37% to > Donations of £95 million (including gift aid) made to charities £192.1m, resulting in underlying EPS growing by 22% to via Virgin Money Giving demonstrating continued support to 39.8p; the communities in which we operate; > Group succession plan in place with strong and improved > Focus on quality achieved with liquidity coverage ratio at coverage. Senior capability enhanced, including the successful 203% and cost of risk at 13bps; and appointment of Peter Bole to the Board; > A continued focus and drive to ensure our customers have > Significant delivery of activities to enhance colleague diversity, been treated fairly measured by the Treating Customer Fairly with increased representation across all minority groups (TCF) scorecard. (disability, ethnicity, gender, LGBT+) in 2017; and 2017 Final outcome: 21.3% out of a maximum 25% > Enhancing the company reputation and brand, for example through the success of the ‘Women in Finance Charter’ and Board membership of UK Finance. 2017 Final outcome: 25% out of a maximum 25% Virgin Money Group Annual Report 2017 I 109 Strategic Report Financial Results
Peter Bole 2017 Deferral (audited) > Enhanced financial control capabilities including disciplined Overall at least 60% of the Executive Directors’ 2017 variable cost control and heightened monitoring and reporting of key pay is deferred from 2021 through 2025 (via a combination of areas of accounting judgement; deferred bonus and LTIP awards). For the 2017 annual bonus, > Further diversification of funding mix with successful RMBS 80% of the annual bonus will be paid in 2018 (half shares/ transaction, regulatory approval of covered bond programme half cash). The remaining 20% will be deferred over seven and implementation of second investment grade credit rating; years with one-fifth vesting in March 2021, one-fifth vesting in March 2022, one-fifth vesting in March 2023, one-fifth > Led debt and equity investor engagement with particular focus vesting in March 2024 and the final one-fifth vesting in March on Group performance and strategy; and 2025. Bonus awards delivered in shares will be subject to a 12-month holding period. No further performance conditions
> Ensured continued compliance with all statutory and Governance regulatory reporting and prepared the Group for transition to apply although awards remain subject to service conditions IFRS 9 from January 2018. and clawback provisions, in line with the Group policy, which includes arrangements for good leavers. 2017 Final outcome: 21.5% out of a maximum 25% The Chief Executive and Chief Financial Officer received 2017 LTIP awards in March 2017 (100% of fixed pay). Awards will be assessed against performance at 31 December 2019 based on the performance conditions set out in detail in the 2016 Directors’ Remuneration Report. One-fifth of the award will vest after four years in March 2021, one-fifth after five years Risk Management Report in March 2022, one-fifth after six years in March 2023, one- fifth after seven years in March 2024 and one-fifth after eight years in March 2025. Further details on these awards are set out on page 117. Financial Statements Other Information 110 I Virgin Money Group Annual Report 2017
Directors’ Remuneration Report
LTIP Awards Vesting (audited) 2015 The Group has delivered strong performance during the period of the 2015 Long Term Incentive Plan, meeting or exceeding the majority of the targets that were set at the IPO. Alongside this strong financial performance, the Group has also made considerable progress against scorecard objectives during the performance period: > Enhanced satisfaction and advocacy is evidenced through increased Customer NPS scores: Since 2014 Customer NPS has risen by 26 points; > Intermediary Sales NPS has risen by 36 points since 2014 to +61 representing upper quartile performance; > Consistent delivery against Virgin Money Giving donations targets (£88 million in 2014; £95 million in 2017. Numbers include gift aid); and > Strong engagement scores throughout performance period. Performance was measured from 1 January 2015 to 31 December 2017 for which, based on the outcomes detailed below, the Remuneration Committee recommends that 65.3% of the maximum award will vest. Shares will be released to participants of the plan, including the Chief Executive, in equal instalments, subject to malus and clawback, over three years with the first vesting scheduled for March 2018.
Performance achievement versus targets Vesting as Weighting Category Measure Threshold Target Maximum % maximum 30% Growth Scorecard of: a) Mortgage market share 2.5% 3% 3.5% 9.1% (gross lending) Actual: 3.3% b) Cards growth (assets) £2,200m £2,450m £2,700m Actual: £3,024m 10% c) Current account, Insurance and Income growth rate (CAGR) in line Investments Income -2% with net interest +2% 0%
Actual: Below Threshold 20% Quality Capital Strength (CET1 ratio) 12.0% 12.5% >12.5%, and up to 15% Actual: 13.8% 10% Cost of Risk 22bps 20bps 18bps 10% Actual: 13bps 30% Returns Underlying Cost: Income ratio1 52.5% 50.0% 47.5% Actual: 51.8% 5.4% Underlying Return on Tangible Equity 13.5% 15.0% 16.5% Actual: 14.0% 5.8% 20% EBO Scorecard of measures relative to Continuous improvement toward top decile performance on external comparators and internal scores Customers, Colleagues, Community, and Corporate Partners 15%
LTIP Vesting (as a percentage of maximum) 65.3%
1 The FSCS Levy was previously excluded from underlying performance measures but it is now included as it is considered to be a recurring cost to the Group however for the 2015 LTIP performance measures have not been adjusted to reflect this change and outcomes are reported in the table excluding the FSCS Levy. Virgin Money Group Annual Report 2017 I 111 Strategic Report Financial Results
Chief Financial Officer – Legacy Award Chief Executive remuneration compared On joining the Group, and prior to his appointment to the with the wider employee population Board, the Chief Financial Officer received share awards to The table below compares the percentage change in compensate for remuneration forfeited as a result of leaving remuneration of the Chief Executive with all colleagues. his previous employment. This included an LTIP buy-out Figures for ‘All Colleagues’ are calculated using salary figures award to which performance conditions based on growth, excluding the Chief Executive, which is considered to be the quality, returns and scorecard measures were applied. most appropriate approach for these purposes. The Remuneration Committee determined that 65.3% of the maximum award will vest based on performance to % change in % change 31 December 2017. Shares will be released to the Chief % change in annual in taxable base salary bonus benefits Financial Officer in July 2018, in line with Mr Bole’s forfeited (2016-2017)1 (2016-2017)2 (2016-2017) Governance awards from his former employer. Chief Executive 4% 6% 11% All Colleagues 4% 18% 11%
Note the percentages for ‘All Colleagues’ included in the table above represent the year-end position as at 31 December 2017 compared with the year-end position as at 31 December 2016. The percentages are adjusted for movements in colleague numbers and other impacts to ensure a like for like comparison. 1 The percentage change for the Chief Executive’s salary represents the difference between the 2017 salary included in the single figure table on page 107 (£780,000) with the corresponding figure in 2016 (£750,000). Risk Management Report 2 This figure represents the average percentage change in full year 2017 Annual Bonuses when compared with full year 2016 Annual Bonuses. Financial Statements Other Information 112 I Virgin Money Group Annual Report 2017
Directors’ Remuneration Report
Relative spend on pay A year-on-year comparison of the relative spend on pay is shown below. Underlying profit before tax has been used for comparison on the basis that it reflects performance, excluding one-off events. Total spend on salaries and performance based compensation in 2017 decreased by 1% as a result of organisational changes in 2016, especially at senior levels. Underlying profit before tax increased by 28%. Dividend distributions in 2017 were £3.1 million higher compared with 2016.
300
250 273.3
200 169.6 213.3 £m 150 173.5 171.8 100
50 20.8 23.9
0 2016 2017 2016 2017 2016 2017 Underlying proÿt Dividends to shareholders Salaries and performance before Tax based compensation
Total Pension Entitlements (audited) Chair and Non-Executive Directors’ fees The Executive Directors do not have a right to a defined (audited) benefit pension in respect of qualifying service. Fees paid in Fees paid in External Appointments 2017 (£000s) 2016 (£000s) The Chief Executive undertakes a number of external Glen Moreno1 350 253 appointments (as set out on page 67). The Chief Colin Keogh 115 111 Executive does not receive any earnings in respect of Norman McLuskie 145 125 these appointments. Marilyn Spearing (to 3/5/17) 43 124 Patrick McCall 80 80 Payments within the reporting year to past Gordon McCallum (to 31/10/17) 67 80 Directors (audited) Geeta Gopalan 110 109 As part of arrangements on leaving the Company: Eva Eisenschimmel (from 25/1/17) 103 – Darren Pope (from 1/3/17) 99 – > the second and final tranche of a 2012 deferred bonus Amy Stirling (from 20/12/17) – – payment totalling £250,312 was released to Finlay Williamson; and 1 Glen Moreno has access to a vehicle for personal use, which is a taxable benefit (£1,228). (£5,618 in 2016). > a 2013 deferred bonus payment totalling £187,767 was Breakdown of Non-Executive Directors’ fees released to Lee Rochford. Non-Executive Directors receive specific committee fees, as Each of the above amounts were delivered in shares, with the set out in the table on page 106. There were no changes to net number of shares subject to a six-month hold period. fees during 2017. Loss of office payments (audited) There were no payments for the loss of office made to former Directors during 2017. Virgin Money Group Annual Report 2017 I 113 Strategic Report Financial Results
Historical TSR performance and Chief Virgin9LUJLQ0RQH\765Y)76( Money TSR v FTSE 350 Executive pay The graph opposite shows the total shareholder return (TSR) of the Company for the period from the date when shares were listed on the London Stock Exchange (18 November 2014) to the end of the 2017 financial year, and the performance of the FTSE 350 Index over the same time period. As a recently listed company, a five-year TSR graph cannot be included. The FTSE 350 Index has been chosen as the comparative broad Q7JSHJO.POFZ equity index because the Company is a member of that index. Q '54& Q For further context and comparison to some competitors, the '54&#BOLT Governance graph also shows the Company’s TSR performance against the FTSE 350 Banks Index over the same period.
Chief Executive remuneration outcomes – since Initial Public Offering Financial year ending 31/12/2014 31/12/2015 31/12/2016 31/12/2017 Chief Executive Jayne-Anne Gadhia Jayne-Anne Gadhia Jayne-Anne Gadhia Jayne-Anne Gadhia Risk Management Report Total remuneration single figure (£000) 3,647 1,617 2,076 2,687 Annual bonus awarded 95% 88% 93% 95% (% of maximum opportunity) Long term Incentive Award vesting – – – 65.3% Financial Statements Other Information 114 I Virgin Money Group Annual Report 2017
Directors’ Remuneration Report
Outstanding share awards (audited) Directors’ share interests The table below summarises shareholdings and share interests as at 31 December 2017.
Owned outright Number of shares1,2,3 Total Unvested (not Unvested subject to (subject to performance performance conditions) conditions) Jayne-Anne Gadhia Ordinary shares 2,016,558 Breakdown of unvested shares: (A) Phantom Share Awards (pre-IPO) 101,710 (B) Deferred Bonus Share Plan Awards 366,938 (C) Long Term Incentive Plan Awards 904,211 3,389,417 Peter Bole Ordinary shares 67,690 Breakdown of unvested shares: (B) Deferred Bonus Share Plan Awards 209,783 (C) Long Term Incentive Plan Awards 369,743 647,216
1 The Executive Directors do not hold any vested or unvested options. 2 All unvested awards above will be subject to tax upon vesting. 3 Unvested shares subject to performance conditions include shares awarded under the 2015 LTIP, the performance period in respect of which expired on 31 December 2017. Virgin Money Group Annual Report 2017 I 115 Strategic Report Financial Results
Breakdown of share interests Further details in respect of the unvested shares included in the Directors’ share interest table are provided in the following tables. The details are in relation to the current Executive Directors and no other Directors have rights to shares. For awards granted prior to 2015, the share numbers referred to in this section are adjusted for the effect of the re-organisation of the Company’s share capital on listing in 2014. (A) Phantom Share Awards Awards were granted prior to IPO under a deferred bonus plan known as the ‘Phantom Incentive Plan’. No further phantom share awards have been granted since listing. No further performance conditions apply, although the awards remain subject to malus and clawback. Holding periods of six months apply to each deferred tranche.
Unvested Governance Awarded Vested Lapsed as at Market during the during the during the 31 Dec value at At 1 Jan 2017 year year year 20172 Date of grant grant1 Notes Jayne-Anne Gadhia 2012 deferred bonus 242,580 – 242,580 – – 18 July 2013 n/a Jayne-Anne Gadhia 203,420 – 101,710 – 101,710 27 February n/a Vests March 2013 deferred bonus 2014 2018 Total 101,710
1 The Company was in private ownership at the date of grant and therefore no market value was available at that time. Risk Management Report 2 All unvested awards above will be subject to tax upon vesting. Financial Statements Other Information 116 I Virgin Money Group Annual Report 2017
Directors’ Remuneration Report
(B) Annual Bonus – Deferred Bonus Share Plan (DBSP) Conditional Share Awards were granted under the Deferred Bonus Share Plan in March 2017 in respect of 2016. For the Chief Executive, the portion of the annual bonus converted into shares had a face value of £680,000. This value was converted into the number of shares shown using the share price on the day immediately preceding grant. No further performance conditions apply, although awards remain subject to malus and clawback provisions. Holding periods of six months apply to each deferred tranche. Details of this award are included in the table below alongside the awards made in respect of 2014 and 2015. The table also sets out awards made to the Chief Financial Officer prior to his appointment as an Executive Director including awards made as part of his joining arrangements (as detailed in the 2015 Directors’ Remuneration Report).
Unvested Awarded Vested Lapsed as at Market At 1 Jan during the during the during the 31 Dec value at 20173 year year year 20172 Date of grant grant1 Notes Vests 26 March Jayne-Anne Gadhia 409p per 2018 and 2014 deferred bonus 221,570 – – – 221,570 26 March 2015 share 2019 Vests 15 March Jayne-Anne Gadhia 377.5p per 2018 and 2015 deferred bonus 52,965 17,655 – 35,310 15 March 2016 share 2019 Vests 15 March 2020, 2021, Jayne-Anne Gadhia 327.1p per 2022, 2023 2016 deferred bonus 207,887 97,829 110,058 15 March 2017 share and 2024 Total 366,938 Vests May and Peter Bole July 2018, Deferred Bonus 1 December 307.5p per December Buy-out 217,889 15,810 202,079 2016 share 2019 Vests 15 March 2020, 2021, Peter Bole 327.1p per 2022, 2023 2016 deferred bonus 7,704 7,704 15 March 2017 share and 2024 Total 209,783
1 Awards are made based on the market value of ordinary shares determined on the dealing day preceding the date of grant. 2 All unvested awards above will be subject to tax upon vesting. 3 Reflects the position for the Chief Financial Officer at the time of appointment to the Board, 25 July 2017. Virgin Money Group Annual Report 2017 I 117 Strategic Report Financial Results
(C) Long Term Incentive Plan Conditional Share Awards were granted under the 2017 Long Term Incentive Plan on 15 March 2017. Awards are subject to performance conditions (as described in last year’s report) that will apply from 1 January 2017 to 31 December 2019, with threshold performance resulting in 20% of the award vesting. The face value of the award made to the Chief Executive was £1,114,000. This value was converted into the number of shares shown using the share price on the day immediately preceding grant. One-fifth of the award will vest after four years in March 2021, one-fifth after five years in March 2022, one-fifth after six years in March 2023, one-fifth after seven years in March 2024, and the final one-fifth after eight years in March 2025 (each with a 12-month holding period). Details of this award are included in the table below alongside the awards made in respect of 2015 and 2016. The table also sets out awards made to the Chief Financial Officer prior to his appointment as an Executive Director including awards made as part of his recruitment (as detailed in the 2015 Directors’ Remuneration Report). All awards are subject to malus and clawback provisions. Governance
Unvested Awarded as at Market At 1 Jan during the 31 Dec value at 20173 year 20172 Date of grant grant1 Notes Vests 26 March 2018, Jayne-Anne Gadhia 409p per 2019 and 2015 LTIP 278,875 – 278,875 26 March 2015 share 2020
Vests 15 Risk Management Report March 2020, 2021, 2022, Jayne-Anne Gadhia 377.5p per 2023 and 2016 LTIP 284,768 – 284,768 15 March 2016 share 2024 Vests 15 March 2021, 2022, 2023, Jayne-Anne Gadhia 327.1p per 2024 and 2017 LTIP – 340,568 340,568 15 March 2017 share 2025 Total 904,211
Peter Bole 1 December 307.5p per Vests 15 July LTIP Buy-out4 153,793 – 153,793 2016 share 2018 Financial Statements Vests 15 March 2020, 2021, Peter Bole 1 December 307.5p per 2022, 2023 2016 LTIP4 32,520 – 32,520 2016 share and 2024 Vests 15 March 2021, 2022, Peter Bole 327.1 per 2023, 2024 2017 LTIP4 183,430 – 183,430 15 March 2017 share and 2025 Total 369,743
1 Awards are made based on the market value of ordinary shares determined on the dealing day preceding the date of grant. Other Information 2 All unvested awards above will be subject to tax upon vesting. 3 Reflects the position for the Chief Financial Officer at the time of appointment to the Board, 25 July 2017. 4 The Chief Financial Officer’s LTIP Buy-out Award, 2016 LTIP Award and 2017 LTIP Award were granted prior to his appointment in to the Board. The awards are subject to performance measures. 118 I Virgin Money Group Annual Report 2017
Directors’ Remuneration Report
Additional disclosures (audited) Shareholding guidelines Executive Directors are expected to hold 200% of salary in shares in the Company built up over five years from listing or recruitment, whichever is the later. As a result of the shareholdings in the table on page 119, the position for Executive Directors in 2017 is as follows:
Shareholding requirement Current shareholding Number of % of base Value of shares salary shares held (at 31.12.17 (at 31.12.17 (at 31.12.17 Requirement % of base closing price closing price closing price met Executive Directors Base salary salary of 284.2p) of 284.2p) of 284.2p) Yes/No Jayne-Anne Gadhia £780,000 200% 548,909 735% £5,731,058 Yes Peter Bole £500,000 200% 351,864 38% £192,375 No Virgin Money Group Annual Report 2017 I 119 Strategic Report Financial Results
Directors’ interests – summary of awards vested and purchases and sales made by directors in 2017 (audited) Holding at Holding at 1 January 2017 Transactions Number of 31 December (or appointment date) during year shares Notes 2017 Jayne-Anne Gadhia 2,438,275 15 March 2017 242,918 Number of shares from vesting of deferred bonus 2,016,558 shares (2012 and 2013 Phantom Incentive and 2015 and 2016 DBSP) after tax 16 May 2017 700,000 Disposal of shares 25 July 2017 35,365 Purchase of shares Peter Bole 59,3381 25 July 2017 8,352 Number of shares from vesting of deferred bonus 67,690
shares (DBSP Buy-out Award) after tax Governance Glen Moreno 71,164 – 71,164 Geeta Gopalan – – – – – Colin Keogh 157,260 – – – 157,260 Patrick McCall – – – – – Gordon McCallum 18,983 10 January 2017 18,983 Disposal of shares for nil consideration by way of – donation to charity Norman McLuskie 90,080 – – – 90,080 Risk Management Report
1 Holding at 25 July 2017 Marilyn Spearing, Eva Eisenschimmel, Darren Pope and Amy Stirling did not hold shares in the Company during the year. There have been no other changes to the above interests between 31 December 2017 and 25 February 2018. On behalf of the Board
Norman McLuskie Chair, Remuneration Committee 26 February 2018 Financial Statements Other Information 120 I Virgin Money Group Annual Report 2017
Directors’ Report
Corporate governance statement The Corporate Governance Report, together with this report of which it forms part, fulfils the requirements of the Corporate Governance Statement for the purpose of the Disclosure Guidance and Transparency Rules (DTR).
Profits and dividends The consolidated income statement shows a profit before tax for the year ended 31 December 2017 of £262.6 million. The Directors have declared/recommended dividends as follows:
Type of dividend Amount per ordinary share Payment date Interim (2016) 1.6p 23 September 2016 Final (2016) 3.5p 10 May 2017 Interim (2017) 1.9p 22 September 2017 Final (2017) 4.1p 16 May 2018 (subject to approval by shareholders at the 2018 AGM)
Post balance sheet events Viability statement Post balance sheet events are disclosed in note 36 to the In accordance with the 2016 UK Corporate Governance Code financial statements. (Code), the Directors have assessed the viability of the Group. Going concern Their assessment has taken into account the Group’s current financial position, assessment of the Group’s prospects and The going concern basis of the Company and the Group is the potential impact of the principal risks, which are set out dependent on successfully funding the balance sheet and on pages 36 to 39. The Directors have determined that a three maintaining adequate levels of capital. In order to satisfy year period to 31 December 2020 constitutes an appropriate themselves that the Company and the Group have adequate period over which to perform this assessment. This period resources to continue to operate for a period of at least presents a reasonable degree of confidence, while providing a twelve months from the date of approval of this report, the longer-term perspective. Directors have considered a number of key dependencies which are set out in the Risk Overview and Risk Management In making this statement, the Directors have considered Report under Principal Risks on pages 36 to 39 and 132, the principal and emerging risks facing the Group, including Funding and Liquidity on page 38 and pages 170 to 181 and those that could potentially threaten the Group’s business Capital position on pages 182 to 188, and additionally have model, future performance, solvency or liquidity. The Group’s considered projections for the Company and the Group’s current and projected capital and liquidity positions have capital and funding position. been assessed in comparison to risk appetite, early warning indicators and regulatory minima. Having considered these and made appropriate enquiries, the Directors consider that the Company and Group have adequate resources to continue in business for a period of at least twelve months from the date of approval of this report. As a result, it is appropriate to continue to adopt the going concern basis in preparing the accounts. Strategic Report Financial Results Governance Risk Management Report Financial Statements Other Information
121
I
appointed 25 January 2017 appointed 25 January 2017 appointed 1 March 2017 retired 3 May 2017 appointed 25 July 2017 retired 31 October 2017 appointed 20 December Date of appointment/retirement appointment/retirement of Date
Virgin Money Group Annual Report Annual 2017 Group Money Virgin risk.
and strategy principal activities, business model the Group’s are described on pages 18 and 19; 130 to emerging risks are disclosed on pages the Group’s 131; actions, are principal risks, including mitigating the Group’s described on pages 132 to 188; and reverse stress and testing approach to stress the Group’s is described on page 129. testing
The Directors confirm they have reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due in the period December to 31 2020. deploy capital. These results take account of theavailability and likely effectiveness of the mitigating actions that could be taken to avoid or reduce the impact or occurrence of underlying The Group performs a range of macro-economic, material most tests, stress the income and idiosyncratic of which relate to rising unemployment, increased base rate and a reduction in HPI. The results show that sufficient capital and liquidity is held to cover the stress scenarios, both in amount and quality. Supporting capital and funding plans are developed to survive the impact of the stress scenarios over the planning horizon. This is captured in the Group’s ICAAP and ILAAP. Information relevant to the Board’s assessment of viability can be found on the following pages: > > > >
Non-Executive Director Non-Executive Director Non-Executive Director Executive Director Non-Executive Director Non-Executive Director Role the Group’s long-term strategy includes the development of long-term strategy the Group’s which during 2018, the SME proposition and the digital bank opportunities. significant future provide the Group has a number of established and new partnership and new established of the Group has a number in other growth for opportunity arrangements providing and income streams; the Group has high-quality assets and diversified funding the Group has high-quality financial performance The business delivered strong sources. in operational with continued improvement in 2017, leverage; the Group’s strong balance sheet position. The Group has strong the Group’s regulatory of well in excess capital and liquidity, strong minima;
Darren Pope Darren Marilyn Spearing Bole Peter McCallum Gordon Stirling Amy Eva Eisenschimmel Eva Name As described in the Corporate Governance Report on thepage Audit 81, Committee Report on page 89 and the Risk Management Report on to 188, pages the 126 Board monitored the Group’s risk management and internal control systems, and oversaw their effectiveness. The monitoring and review covered all material controls, including financial, operational compliance and controls. The Board considers its strategic plan at least annually and monitors it on an ongoing basis. This plan is stress tested and includes a review of the sensitivity of theGroup to business as usual risks and other severe but plausible events. The Board considers the ability of the Group to raise finance and Directors The names and biographical details of the current Directors are shown on pages 66 to 68. Changes to the composition of the Board since and 1 January up to the date of this 2017, report, are shown in the table below. > > > > The Group’s strategy is set out on of pages theto 19 18 Strategic Report. The key factors which support the future prospects of the Group are:
122 I Virgin Money Group Annual Report 2017
Directors’ Report
Appointment and retirement of Directors Information included by reference The appointment, retirement and/or replacement of Directors The following information forms part of the Directors’ Report is governed by the Articles of Association of the Company and is incorporated into the report by reference. (Articles), the Code and the Companies Act 2006 (Act). The Articles may be amended only by a special resolution of the Subject matter Page/note reference shareholders in a general meeting. Colleague engagement 101 and remuneration The Directors appointed to the Board since the 2017 AGM will stand for election by shareholders at the 2018 AGM. In Dividends Note 11 the interests of good governance, all of the other Directors Directors’ interests in shares 118 and 119 will also retire and those wishing to serve again will submit Internal control and risk management 81, 89 and 126 to 188 themselves for re-election at the 2018 AGM. systems in relation to financial reporting Virgin will be entitled to vote on the ordinary resolutions at the Information in relation to the use of 126 to 188 AGM for the re-election of the Independent Non-Executive financial instruments Directors. However, for the purposes of the Listing Rules, Share capital and control Share capital and each such resolution will also require approval by a majority restrictions on the transfer of shares or voting rights -
of the votes cast by the Company’s independent shareholders Note 27, page 237 to 238 (being the shareholders excluding Virgin) in order to be valid. Special rights as regards The outcome of both of these vote counts will be announced control of the Company – following the 2018 AGM. Note 27, page 237 to 238 Directors’ indemnities Information included in the Strategic Report The Directors and former directors have entered into Subject matter Page reference individual deeds of indemnity with the Group which constitute ‘qualifying third party indemnity provisions’ for the purposes Future developments 18 to 29 of the Act. The deeds indemnify the Directors to the maximum Inclusion and diversity (including 14 to 15 and 22 to 23 extent permitted by law and remain in force for the duration employment of disabled people) of a Director’s period of office and for a six-year period Emissions reporting 28 to 29 thereafter. The deeds were in force during the whole of the financial year and remain in force at the date of this report. Colleague engagement Information of matters relevant to employees, including Deeds for current Directors, and the former directors who financial and economic factors affecting the performance retired during the year, are available for inspection at the of the Group, is communicated on a regular basis, with Company’s registered office. In addition, the Group had engagement measured through an annual third-party survey. appropriate Directors and Officers’ liability insurance cover, as well as Professional Indemnity insurance cover, in place throughout 2017. Strategic Report Financial Results Governance Risk Management Report Financial Statements Other Information
123
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Direct
Direct/
Indirect Indirect indirect interest interest
rights 6.62% 12.08% 34.86% % voting of
Ordinary Ordinary 53,756,010 29,475,132 shares held 155,120,454 Virgin Money Group Annual Report Annual 2017 Group Money Virgin Substantial shareholders Information provided to the Company by substantial shareholders pursuant to the DTR is published via a Regulatory Information Service. As December at 31 2017, the Company has been notified under DTR Rule 5 of the interests in its issued share capital as set out below. All such share capital has the right to vote in all circumstances at meetings. general Information provided to the Company under the DTR is publicly available via the regulatory information service and on the Company’s website. and in the Articles and in certain circumstances, including in relation to the issuing or buying back by the Company of its shares, are subject to authority being given tothe Directors by shareholders in general meeting. The Company did not repurchase any of the issued ordinary shares during 2017 and up to the date of this report pursuant to the authority granted AGM at (where the 2017 the Company was authorised to buy back up to 44,494,200 ordinary shares, representing 10% of the Company’s issued ordinary share capital as at 23 March 2017). Shareholders will be asked at AGM the to renew 2018 the authorities granted AGM at to the allot, 2017 issue and buy back shares, taking into account the latest institutional shareholder guidelines.
Page reference Page 80 133 Note 11, page 266 Note 27, page 237 Note 28, page 238 Note 35, page 247
plc Life Aberdeen Standard companies group of Prudential plc As at 31 December 2017 As at 31 December Shareholder Virgin Group Holdings Limited Significant contracts Publication of unaudited financial unaudited of Publication information Dividend waivers securities equity Allotment of securities equity other Allotment of (ATI securities) Subject matter Relationship agreement In the period from December 31 to the date 2017 of this report, the Company has received a notification from Standard Life Aberdeen plc. This notification indicates that the Standard Life Aberdeen plc shareholding as at the date of this report is 52,988,708 ordinary shares representing 11.91% of the total voting rights attached to issued share capital. The is indirect.holding Voting and Directors’ and powers Voting The Company operates an employee benefit trust (EBT), which holds ordinary shares on trust for the benefit of employees and former employees of the Group, and their dependants, and which is used in conjunction with the Group’s employee share schemes. Whilst ordinary shares are held in the the EBT, voting rights in respect of these ordinary shares are exercised by the trustees of the EBT. The powers of the Directors, including in relation to the issue or buy back of the Company’s shares, are set out in the Act under LR 9.8.4R required Disclosures
124 I Virgin Money Group Annual Report 2017
Directors’ Report
Change of control Statement of Directors’ responsibilities The Company is not a party to any significant contracts The Directors are responsible for preparing the Annual Report that are subject to change of control provisions in the event and the financial statements in accordance with applicable law of a takeover bid, other than the Virgin Money Trademark and regulation. Licence Agreement. This is the agreement under which Company law requires the Directors to prepare financial Virgin Enterprises Limited (VEL) grants a perpetual licence statements for each financial year. Under that law the Directors to Virgin Money providing the right to use the ‘Virgin’ and have prepared the Group financial statements and the Company ‘Virgin Money’ trademarks. VEL has the right to terminate the financial statements in accordance with IFRS as adopted by the agreement in the event of a change of control, other than a European Union (EU). Under company law the Directors must change of control pre-approved by VEL. VEL shall be entitled not approve the financial statements unless they are satisfied to withhold consent only in the event of a takeover by a third that they give a true and fair view of the state of affairs of the party who, in VEL’s reasonable opinion, is a direct competitor Group and Company and of the profit or loss of the Group and of VEL or any Virgin entity in the UK, or whose reputation or Company for that period. In preparing the financial statements, financial standing is reasonably likely to damage materially the Directors are required to: the value or reputation of the Virgin brand. > select suitable accounting policies and then apply them There are no agreements between Virgin Money and its consistently; Directors or employees which provide compensation for loss of office or loss of employment that occurs because of > state whether applicable IFRS as adopted by the EU have been a takeover bid. followed for the Group and Company financial statements, subject to any material departures disclosed and explained in the In the event of a takeover or other change of control financial statements; (excluding an internal reorganisation), outstanding awards under the Group’s share plans vest to the extent any > make judgements and accounting estimates that are reasonable applicable performance conditions have been met and, and prudent; and subject to applicable time pro-rating, in accordance with the > prepare the financial statements on the going concern basis rules of the plans. unless it is inappropriate to presume that the Group and Research and development activities Companywill continue in business. During the ordinary course of business the Group invests in the development of platforms, products and services. During 2017 the Group has invested in the build of the Virgin Money digital bank. Strategic Report Financial Results Governance Risk Management Report Financial Statements Other Information
125
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all the steps that they ought to have taken as ought to have that they all the steps
Virgin Money Group Annual Report Annual 2017 Group Money Virgin taken have
Marshall
they so far as the Director is aware, there is no relevant audit audit so there is no relevant aware, is far as the Director information ofwhich and are unaware; auditors the Company’s relevant any of to make themselves aware in order a Director that the Company’s information and to establish audit that information. of are aware auditors
> re-appointment of Resolutions the concerning PricewaterhouseCoopers LLP as auditors and authorising the Audit Committee to set the auditors’ remuneration will be proposed at AGM. the 2018 On behalf of the Board Katie SecretaryCompany February26 2018 Virgin Money Holdings (UK) plc Registered No. 03087587 Independent auditors audit and information Each of the Directors whois in office at the date of this report and whose name is listed on pages 66 to 68 confirms that: >
the financial statements, prepared in accordance with the statements, prepared in accordance the financial give a true and fairview standards, accounting applicable set of of the or loss the assets, liabilities, financial position and profit of the undertakings included in the consolidation and Company whole; and taken as a the management report contained in the Strategic Report and the development of review the Directors’ Report includes a fair the Group the business and the position of and performance of and Company, togetherwith the principal risks a description of face. and uncertainties that they
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Group and Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Group and Company and enable them to ensure that the financial statements and the Directors’ Remuneration Report comply with the Act and, as regards the Group financial statements, Article 4 of the IAS Regulation. The Directors are also responsible for safeguarding the assets of the Group and Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The Directors are responsible for the maintenance and integrity of the Company’s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. Responsibility Directors respect statement the the in of of Financial ReportAnnual Each of the Directors who is in office at the date of this report and whose names and functions are listed on pages 66 to 68, confirms that, to the best of their knowledge: > > The Directors consider that the Annual Report and Accounts, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Group and Company’s position and performance, business model and strategy.
126 I Virgin Money Group Annual Report 2017
Risk Management Report
127 The Group’s approach to risk management 129 Risk management framework 130 Emerging risks 133 Risk classes 134 Full analysis of risk classes
Virgin Money Lounge, Glasgow Virgin Money Group Annual Report 2017 I 127 Strategic Report
The Group’s approach to risk management Financial Results
Risk management is at the heart of the Group’s strategy to enable profitable, long-term growth. This is achieved through a clearly defined risk appetite and informed risk decision- making, supported by a consistent risk-focused culture across the Group.
Risk culture and values Accountability The Group has a customer-focused business model built The Group uses a ‘Three Lines of Defence’ model which on a prudent risk culture that reinforces accountability. defines clear responsibilities and accountabilities. This The Group’s risk values, outlined below, describe how all ensures effective independent assurance over key colleagues, suppliers and partners are expected to operate. business activities. > line management (first line) have primary responsibility for risk
decisions; measuring, monitoring and controlling risks within Governance their areas of accountability. They are required to establish 6OEFSTUBOE %PUIF $IBMMFOHF ZPVS effective controls in line with policy, to maintain appropriate SJHIUUIJOH UIFTUBUVTRVP SFTQPOTJCJMJUJFT risk management skills, practices and tools, and to act within Board-approved risk appetite parameters. All Executives undertake a monthly control effectiveness review and a quarterly risk and control attestation; Risk appetite > the Risk function (second line) provides proactive advice and Risk appetite is the amount and type of risk that the Group constructive challenge on the effectiveness of risk decisions is prepared to seek, accept or tolerate. It is reflected Risk Management Report taken by line management. It is responsible for the design in frameworks and policies that either limit or, where and development of the risk management framework and risk appropriate, prohibit activities that could be detrimental to appetite. It provides a view of the Group’s risk profile while the Group. The Group’s strategy is developed in conjunction reporting against risk appetite to the Board. It also oversees with risk appetite. The Group’s risk appetite is approved by the the Group’s internal stress testing framework and maintains Board with each strategic planning cycle. the Group’s relationship with regulators; and Governance and control > Internal Audit (third line) provides independent, objective Delegation of authority from the Board to Executive assurance to improve operations. It helps the Group achieve Committees and Senior Management establishes governance its objectives by bringing a systematic, disciplined approach to and control. Issues are escalated promptly and remediation evaluate and improve the effectiveness of risk management, plans are initiated where required. control and governance processes. The key responsibilities of the Board and senior management Financial Statements include setting risk appetite, agreeing the risk management framework, and approving policies and practices. Other Information 128 I Virgin Money Group Annual Report 2017
Risk Management Report
The Group’s approach to risk management
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Risk management framework Financial Results
The Group’s risk management framework is the foundation for Stress testing the delivery of effective risk management and is structured Stress testing is an essential risk management tool which around the following components: examines the sensitivities of the strategic plan and business model and supports the development of management actions and contingency plans. It is overseen by the Board
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External Forces* > develop the Recovery Plan for the business including the identification of material recovery options. * External forces Legal Customer Political Reverse stress testing is used to explore the vulnerabilities of Regulatory Competitor Technological the Group’s strategies and plans in extreme adverse situations Economic Supplier/Partner with the aim of improving contingency planning. The Senior Managers and Certification Regime outlines Risk identification and control assessment stress testing as a prescribed responsibility, with clear The process to identify, measure and control risk is integrated accountabilities and responsibilities assigned to senior into the overall risk governance framework. Risk identification management and the Risk and Finance functions. The Chief processes are forward-looking to ensure emerging risks Risk Officer is the Executive accountable for stress testing. are identified. Risks are captured in risk logs and measured Financial Statements using consistent methodologies. Risk measurement includes the application of stress testing and scenario analysis, and considers whether relevant controls are in place. Risk decision-making and reporting A current and forecast view of the Group’s overall risk profile, key exposures and management actions is reported to the Risk Management Committee, the Board Risk Committee and the Board. The Chief Risk Officer is a member of the Executive and has direct access to the Chair of the Board Risk Committee. Other Information 130 I Virgin Money Group Annual Report 2017
Risk Management Report
Emerging risks
The Group considers the following to be key emerging risks > the Group monitors its credit and liquidity positions, that have the potential to affect the performance of the Group. operational capability and risk of disruption to payment and Macro-economic environment other systems, to ensure it remains responsive to changes in The UK economy remained resilient through 2017 and the macro-economic environment; performed better than markets had expected at the beginning > the Group continues to review its capital plan in light of market of the year. The economic outlook for 2018 has been conditions; and strengthened by global growth. Whilst there continues to be > retail funding is supplemented by a diversified wholesale no evidence of material changes in customer behaviour, the funding programme and the Group is planning its inaugural potential risks around inflation, a slowing housing market and Covered Bonds issuance in H1 2018. rising unemployment remain. Macro-structural landscape The Bank of England increased interest rates from 0.25 There is a significant volume of regulatory change which will per cent to 0.50 per cent in November 2017, and there is impact the Group over the coming year. These changes may the expectation that rates will continue to rise gradually also lead to increased competition. over the next three years. Low wage growth and higher inflation may put pressure on some household budgets and Changes to capital requirements include an increase to the the Group remains alert to signs of customers in financial countercyclical buffer, implementation of Structural Reform distress. The commercial performance of the credit card and the introduction of Minimum Requirements for Own portfolio is exposed to changes in consumer behaviour and Funds and Eligible Liabilities (MREL). Further information the Group continues to monitor this closely. In addition, regarding these changes can be found on page 183. changes to central bank rates can represent risk to future Open Banking and the second Payment Services Directive financial performance. (PSD2) came into force in January 2018, and General Data The mortgage market saw heightened competition in the Protection Regulation (GDPR) is due to follow in May. These second half of 2017 which may continue in 2018. regulatory change programmes are aimed at protecting the consumer and introducing greater choice. Consequently, they Political and economic uncertainty, including the impact are expected to have a material impact on the competitive of the UK leaving the European Union, could impact the environment in which the Group operates, with non-bank wholesale funding markets. In addition, the closure of the firms potentially entering the market. Bank of England’s Term Funding Scheme (TFS) has led to cumulative refinancing risk across the industry. The Group’s IFRS 9 is effective from 1 January 2018 and will result in drawings from the TFS will be refinanced in the medium term. new calculations of expected credit loss and additional The Group has a well-diversified wholesale funding portfolio disclosure requirements. and further issuances of Residential Mortgage Backed The EU’s Markets in Financial Instruments Directive (MiFID II) Securities, Global Medium Term Notes and Covered Bonds are reforms are effective from January 2018. They are designed planned for 2018. to promote investor protection and increase market Key mitigating actions transparency and efficiency. The Group is compliant with the > there is an ongoing programme of stress testing to assess new regulations. vulnerability to changing macro-economic conditions and to inform the strategic planning process; > the Group continues to monitor key exposures in light of the prevailing and forecast economic outlook, and tests its readiness to respond to future changes in the economy; > additional oversight activities have been implemented, alongside contingency plans, which are designed to respond to and mitigate the impact of adverse conditions that may emerge;
Virgin Money Group Annual Report 2017 I 131 Strategic Report Financial Results
Key mitigating actions Cyber-crime and financial crime risk > the Board is focused on responding effectively and efficiently The external threat of cyber-crime continues with reports to changes in the regulatory environment and overseeing the of data and security breaches increasing in frequency delivery of these regulatory changes; and severity across all industries. Ongoing evidence of > the business planning process incorporates the Group’s view of ransomware attacks emphasises the need for firms to remain emerging capital requirements; alert to the emerging threat environment with detective and preventative processes and systems. > stress and scenario testing forms an integral part of the Group’s strategic and capital planning; The FCA regards financial crime risk as a significant threat to realising their objective to promote and enhance the integrity > the Group actively participates in regulatory developments, of the UK financial system and emphasises the need for firms
engaging with HM Treasury, the PRA, the FCA and the Bank to ensure they have adequate and effective systems and Governance of England on the evolving UK regulatory framework and the controls to manage this. impact of EU directives; and Key mitigating actions > new impairment models and business processes have been > the Group has a Cyber Security Strategy to enhance its control developed and embedded to meet the requirements of IFRS 9. environment, IT resilience and information security capability, Balance sheet risk taking account of both the external threat environment and Credit the changing risk profile of the business; Low wage growth and higher inflation could cause a > the Group remains responsive to newly identified external reduction in household real earnings. In a rising interest rate vulnerabilities, increasing monitoring where required to Risk Management Report environment, the cost of borrowing may increase. Combined mitigate risk to the Group; and with potential concern around consumer indebtedness, these factors could lead to increases in defaults and impairments. > the Group has in place a strategic financial crime programme designed to enhance the Group’s systems and controls. In relation to the housing market, although the potential for the weakening of regional house prices exists, inflation, Supplier partnerships low unemployment and record low mortgage rates support The Group works with mortgage intermediaries and manages consumer affordability while supply shortages continue to outsourced relationships with third parties who support support house prices. the credit card, investment and insurance business lines. The Group has strategic suppliers for key components Key mitigating actions of its infrastructure. Reliance on key corporate partners > the Group has well-established early warning indicators to and strategic suppliers gives rise to risks in relation to
highlight signs of regional stress in the housing market; operational continuity. Financial Statements > the Group has tightened credit card scorecard cut-offs and Key mitigating actions implemented policy restrictions during the year to protect the > the Group develops its supplier partnership and oversight credit quality of new card lending; and capability to minimise the risk of service disruption caused by > the Group will continue to protect asset quality. the failure of a third party; > the Group engages specialist third parties to undertake targeted reviews of supplier performance as required; and > the Group outsources the administration of its unit trust and pension business to DST (formerly IFDS). During 2017, DST progressed a significant programme of remediation relating to compliance with client asset regulations which will continue Other Information into 2018. The Group continues to strengthen its oversight of DST. 132 I Virgin Money Group Annual Report 2017
Risk Management Report
Exposure to risk by business activity
The table below provides a high-level illustration of how the Group’s business activities are reflected in risk-weighted assets.
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1 Virgin Money does not have a trading book and, as such, does not have material exposure to market risk. Interest Rate Risk in the Banking Book is captured as part of Pillar 2 capital and therefore does not give rise to risk-weighted assets.
Principal risks The Board have carried out a robust assessment of the principal risks facing the Group, including those that would threaten its business model, future performance, solvency or liquidity. The Group’s principal risks are shown in the Risk overview on pages 36 to 39. The Group’s emerging risks are shown on pages 130 and 131. Full analysis of the group’s risk classes is shown on pages 134 to 188. Virgin Money Group Annual Report 2017 I 133 Strategic Report
Risk classes Financial Results
The Group’s risk framework covers all types of risk which affect the Group and could impact on the achievement of strategic objectives. A detailed description of each category is provided on pages 134 to 188. All disclosures in the Risk Management Report are unaudited, unless otherwise stated. Additional information can be found in the Pillar 3 disclosures on the Group’s website.
Risk Values and Licence to Operate
Capital Pillar 1 Capital Pillar 2
Strategic and Operational Financial Risk LiquidityC apital Credit Risk Market Risk Risk Infrastructure Risk Conduct Risk and Compliance Business Risk Governance
Retail WholesaleC onduct Compliance
Foreign Operational Macro- Interest Rate Wholesale Business Financial Partner Upstream economic Retail Capital Mortgage Credit Risk Exchange Risk Resiliance Crime Conduct Regulation Risk in the Funding Risk Suÿciency Risk Risk Banking Book
Payment & Personal Technology Colleague Retail O˛ -Balance Large Market Regulatory Transformation Concentration Sheet Capital Current Exposures Risk Competence Reporting Risk Eÿciency Accounts Infrastructure Risk Liquidity Risk Risk Risk Management Report Physical Secured Information Security & Incentives Critical and Legal Marketable Credit Cards Security & and Reward Important Wholesale Environmental Risk Debt Asset Risk Cyber-crime Risk Outsourcing
Accessible Non-fnancial Sourcebooks Reputation Franchise Collections Information Banking & CASS & Recoveries Management Counterparty Financial Risk Pricing Viability Risk COLL Management Risk Inclusion MCOB BCOB BIPRU Sales COB Practices & Competitive Model Risk Wholesale CCA Environment Funding Risk Advice REMCODE
Wholesale Product Senior Political Credit Funding Design Persons Risk Concentration Concentration Risk Risk
Under- Post sale Markets Intra-Day Administration estimation of Financial Statements Compliance Credit Risk Liquidity Risk
Customer Outcomes, Anti Money Replenishment Settlement Risk and Complaints & Laundering Risk Remediation Collateral
Financial Promotions & Fund Marketing Governance
Privacy and Data Protection Other Information 134 I Virgin Money Group Annual Report 2017
Risk Management Report
Full analysis of risk classes
Credit risk Measurement Definition The Group uses statistical models, supported by both internal Credit risk is defined as the risk that a borrower or and external data, to measure retail credit risk exposures. counterparty fails to pay the interest or the capital due The models reflect three components: (i) the ‘probability on a loan or other financial instrument (both on and off- of default’ (PD) by the borrowers on their contractual balance sheet). obligations, (ii) current exposures to the borrowers and their Risk appetite likely future development (‘exposure at default’), and (iii) the The Group has appetite for high-quality credit exposures likely loss ratio on the defaulted obligations (the ‘loss given including retail lending and liquid wholesale investments. default’). These parameters are used in order to derive an expected loss and assess capital allocation. Exposures The principal credit risks arise from loans and advances to Portfolios are assessed by using segmentation for customers, debt securities and derivatives. The credit risk measurement and reporting purposes. Details of the exposures of the Group are set out on page 138. Credit risk classifications used for asset quality can be found on page 137. exposures are categorised as retail (secured and unsecured) The Group uses Advanced Internal Ratings Based (AIRB) and wholesale. models in measuring the credit risk of secured loans and In terms of loans and advances, credit risk arises advances to customers. All retail unsecured and wholesale both from amounts lent and commitments to extend exposures are measured under the Standardised Approach for credit to a customer. This applies to the secured and regulatory capital. unsecured portfolios. The Group’s credit portfolios are subject to regular stress Retail mortgages expose the Group to customer re-mortgage testing. Further information on the stress testing process, risk. Re-mortgage risk is the possibility that an outstanding methodology and governance can be found on page 129. exposure cannot be repaid at its contractual maturity date. Page 143 provides details of the Group’s approach to the The debt management strategies employed by the Group are impairment of financial assets. Refer to note 1 to the financial detailed on page 151. statements. From 1 January 2018, the Group will transition to The Group’s buy-to-let lending policy is targeted towards the new accounting requirements of IFRS 9. retail customers rather than professional landlords, with Mitigation specific restrictions in place on total exposures by loan The Group uses a range of approaches to mitigate credit risk. amount and number of properties. Credit policy The Group’s unsecured portfolio has grown in line with The Risk function uses risk appetite to set the credit policy expectations and within strict underwriting criteria. The for each type of credit risk. These policies are supported Group has increased scorecard cut-offs for some customer by lending manuals which define the responsibilities of segments during 2017. The Group assesses customer underwriters and provide a rule set for credit decisions. The affordability rigorously and takes into account the total risk appetite, target market and risk acceptance criteria are unsecured debt held by a customer, and their ability to repay reviewed at least annually. Risk oversight teams monitor early existing debt as well as the additional credit requested. warning indicators, credit performance trends, and key risk Credit risk in the wholesale portfolio arises from debt indicators, and review and challenge exceptions to planned securities and derivatives. The Group’s wholesale credit risk outcomes. Counterparty exposures are regularly reviewed exposure is covered on page 153. and action taken where necessary. Risk Assurance perform independent risk-based reviews to provide an assessment of the effectiveness of internal controls and risk management practices. Oversight and review is also undertaken by Internal Audit. Virgin Money Group Annual Report 2017 I 135 Strategic Report Financial Results
Controls over AIRB rating systems Buy-to-let is limited to a maximum of 75% LTV and residential The Group has an established Independent Model Validation interest only is limited to a maximum of 70% LTV, regardless team that sets common minimum standards for predictive of loan size. Residential mortgage applications in excess of modelling development and operations. The standards are £1 million are approved by exception. designed to ensure risk models and associated AIRB rating The PRA introduced more rigorous stress testing for landlords systems are developed consistently, and are of sufficient with four or more mortgaged buy-to let properties, effective quality to support business decisions and meet regulatory from September 2017. The Group has taken a conservative requirements. approach to applying these minimum standards and will Credit underwriting continue to review buy-to-let lending policy. The number of The Group uses a variety of lending criteria when assessing buy-to-let mortgages held by a customer is capped at three applications for secured and unsecured lending. The general and the maximum customer exposure is capped at £2 million. Governance approval process uses credit acceptance scorecards and The Group’s approach to underwriting applications for involves a review of an applicant’s previous credit history unsecured products takes into account the total unsecured using information held by credit reference agencies. debt held by a customer and their ability to afford to The Group assesses the affordability of the borrower under repay that debt. stressed scenarios including increased interest rates. The Group uses statistically based decisioning techniques In addition, the Group has in place limits on permitted (primarily credit scoring models) for its retail portfolios. indebtedness which take into account the debt customers hold with other lenders. Debt management for customers in financial difficulty The Group’s aim in offering forbearance and other assistance Risk Management Report The Group rejects any application for a product where a to retail customers in financial distress is to benefit both customer is registered as bankrupt or insolvent, or has a the customer and the Group by discharging the Group’s County Court Judgement registered at a credit reference responsibilities to support customers and act in their best agency used by the Group. In addition, the Group’s approach long-term interests. This allows customer credit facilities to to underwriting applications takes into account the total be brought back into a sustainable position. The Group offers unsecured debt held by a customer and their ability to a range of tools and assistance to support customers who are afford that debt. encountering financial difficulties. Cases are managed on an For residential mortgages, the Group’s policy is to accept only individual basis, with the circumstances of each customer standard applications with a loan-to-value (LTV) of less than considered separately and the action taken designed to be 95%1. The Group has maximum % LTV limits which depend affordable and sustainable for the customer. upon the loan size. Residential mortgage limits are: Customers are assisted by the Debt Management function Financial Statements Loan size from To Maximum LTV where tailored repayment programmes can be agreed. Customers are actively supported and referred to free money £1 £500,000 95% (purchase) 90% (re-mortgage) advice agencies in instances where they have multiple credit facilities, including those at other lenders, which require £500,001 £1,000,000 80% restructuring. Specific tools are available to assist customers which vary by product and the customer’s status. Further details can be found on page 151. Income and expenditure assessments are undertaken for all customers entering into a long-term repayment plan. This
ensures that customers are provided with a sustainable and Other Information affordable solution that allows them a realistic opportunity to repay their debt in the short to medium term. In addition, the Group will advise customers to contact debt management companies such as Citizens Advice Bureau, StepChange and 1 All originations included in the comparative period to 31 December 2016 which were PayPlan. These companies do not charge any fees and will between 90% and 95% LTV were only permitted under the Help to Buy loan guarantee scheme. 136 I Virgin Money Group Annual Report 2017
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offer advice to customers as well as work with creditors to Monitoring agree affordable repayment plans. Understanding what has The Group produces regular portfolio monitoring reports for changed and establishing the customers’ current and future review by Senior Management. The Risk function produces a financial situation is imperative to ensuring that the right review of credit risk throughout the Group, including reports level of support is offered and that customers receive the on significant credit exposures, which are presented to the appropriate solution to help them manage their debt when in Risk Management Committee and the Board Risk Committee. financial difficulty. The performance of all rating models is monitored on a regular Collateral for secured retail and wholesale exposures basis to ensure that: The sole collateral type for secured loans is residential > appropriate risk differentiation capability is provided; real estate. Property offered as collateral must be of acceptable construction and located in England, Wales, > generated ratings remain as accurate and robust as practical; Scotland or Northern Ireland. Title to the property must be and good, marketable and free from onerous restrictions and > appropriate risk estimates are assigned to grades and pools of conditions. The Group requires first legal charge over the accounts. property offered as collateral and does not accept charges In the event that the monitoring identifies material exceptions over part of the collateral. The Group does not lend where the or deviations from expected outcomes, these are escalated collateral is land only. for resolution. Collateral held as security for financial assets other than loans Forbearance and provisioning and advances is determined by the nature of the instrument. The Group’s approach is to ensure that provisioning models, Debt securities, treasury and other bills are generally supported by management judgement, appropriately unsecured, with the exception of asset-backed securities and reflect the incurred loss risk of exposures. The Group uses similar instruments such as covered bonds, which are secured behavioural scoring to assess customers’ credit risk and the by portfolios of financial assets. Collateral is generally not held models take into account a range of potential indicators of against loans and advances to financial institutions, except customer financial distress. where a collateral agreement has been entered into under a master netting agreement. Impaired assets are reviewed on an ongoing basis. Regular detailed analysis of impairment provisions is undertaken All new eligible derivative transactions with wholesale recognising the impact of forbearance activities. Further counterparties are centrally cleared with cash posted as details on forbearance can be found on page 151. collateral to further mitigate credit risk. Residual and non- eligible trades are collateralised under a Credit Support Annex in conjunction with the ISDA Master Agreement. The Group will receive additional collateral from certain counterparties in the event their external credit rating falls below contractually set triggers as agreed in the Credit Support Annex. It is the Group’s policy that, at the time of borrowing, collateral should always be realistically valued by an appropriately qualified source, independent of both the credit decision process and the customer. Collateral valuation is reviewed on a regular basis. Virgin Money Group Annual Report 2017 I 137 Strategic Report Financial Results
Credit quality of assets Loans and receivables Unsecured exposures are categorised as: The Group defines three classifications of credit quality (low > higher risk where assets are past due; risk, medium risk and higher risk) for all credit exposures. > medium risk where assets are currently not past due but are Secured credit exposures are segmented according to the benefitting from a forbearance solution; and credit quality classification and a point-in-time PD. The point- in-time PD is an internal parameter used within the Group’s > low risk where assets are neither past due nor in forbearance. AIRB capital models which aims to estimate the probability Wholesale credit exposures are assessed by reference to of default over the next 12 months based on account credit rating. The Group’s wholesale exposures are investment characteristics and customer behavioural data. Default occurs grade and therefore classified as low risk. where the borrower has missed six months of mortgage Governance No wholesale credit exposures were past due or impaired as at repayments or the borrower is deemed to be unlikely to repay 31 December 2017 and 31 December 2016. their loan. Exposures are categorised as: Further asset quality categorisation is disclosed on page 140, > higher risk where assets are past due or have a point in time PD which reflects the impairment status of assets. greater than 2%; > medium risk where assets are not past due and have a PD greater than 0.8% and less than or equal to 2%; and > low risk where assets are not past due and have a PD less than or equal to 0.8%. Risk Management Report Financial Statements Other Information 138 I Virgin Money Group Annual Report 2017
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Credit risk portfolio as at 31 December 2017 The tables below show the total credit risk exposures for the Group’s retail and wholesale portfolios.
Secured Unsecured Wholesale Residential Residential buy-to-let mortgage mortgage Treasury Derivative loans loans Credit cards Overdrafts assets exposures Total 2017 (audited) £m £m £m £m £m £m £m Total gross loans and 27,317.2 6,367.3 3,071.3 0.1 – – 36,755.9 advances to customers > of which are low risk 26,770.5 6,322.5 3,025.2 0.1 – – 36,118.3 > of which are medium risk 220.0 11.7 3.5 – – – 235.2 > of which are higher risk 326.7 33.1 42.6 – – – 402.4 Loans and advances to banks – – – – 359.4 – 359.4 Cash and balances at – – – – 2,579.0 – 2,579.0 central banks Debt securities classified – – – – 0.3 – 0.3 as loans and receivables Available-for-sale financial – – – – 1,051.8 – 1,051.8 assets Gross positive fair value of – – – – – 78.8 78.8 derivative assets Total 27,317.2 6,367.3 3,071.3 0.1 3,990.5 78.8 40,825.2
All of the Group’s wholesale exposures are categorised as low risk. Virgin Money Group Annual Report 2017 I 139 Strategic Report Financial Results
Secured Unsecured Wholesale Residential Residential buy-to-let mortgage mortgage Treasury Derivative loans loans Credit cards Overdrafts assets exposures Total 2016 (audited) £m £m £m £m £m £m £m Total gross loans and 24,283.0 5,468.4 2,486.5 0.1 – – 32,238.0 advances to customers > of which are low risk 21,565.5 5,256.8 2,451.2 0.1 – – 29,273.6 > of which are medium risk 1,699.5 172.1 2.9 – – – 1,874.5
> of which are higher risk 1,018.0 39.5 32.4 – – – 1,089.9 Governance Loans and advances to banks – – – – 635.6 635.6 Cash and balances at – – – – 786.3 – 786.3 central banks Debt securities classified – – – – 0.7 – 0.7 as loans and receivables Available-for-sale financial – – – – 858.8 – 858.8 assets
Gross positive fair value – – – – – 104.2 104.2 Risk Management Report of derivative assets Total 24,283.0 5,468.4 2,486.5 0.1 2,281.4 104.2 34,623.6
In addition, the maximum credit risk exposure of the Group notice requirements. No account is taken of any collateral includes off-balance sheet items. held, other credit enhancements or provisions for These items relate to applications that have been impairment. As at 31 December 2017, off-balance sheet approved and have not yet been drawn by the customer, items totalled £6.2 billion (2016: £5.3 billion) and were all and undrawn loan commitments. These commitments classified as low risk. represent agreements to lend in the future and may be decreased or removed by the Group, subject to product Financial Statements Other Information 140 I Virgin Money Group Annual Report 2017
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Loans and advances to customers comprise:
2017 2016 (audited) £m £m Advances secured on residential property not subject to securitisation 21,878.7 19,375.2 Advances secured on residential property subject to securitisation 5,438.5 4,907.8 Total advances secured on residential property 27,317.2 24,283.0 Residential buy-to-let loans not subject to securitisation 6,367.3 5,468.4 Total loans and advances to customers secured on residential property 33,684.5 29,751.4 Allowance for impairment – secured (12.1) (10.6) Total loans and advances to customers – secured 33,672.4 29,740.8 Credit cards 3,071.3 2,486.5 Overdrafts 0.1 0.1 Unsecured receivables not subject to securitisation 3,071.4 2,486.6 Allowance for impairment – unsecured (47.3) (39.5) Total loans and advances to customers – unsecured 3,024.1 2,447.1 Total loans and advances to customers excluding portfolio hedging adjustment 36,696.5 32,187.9
The mortgage portfolio is secured on residential and buy-to-let properties and represented 91.6% of total loans and advances to customers at 31 December 2017. Residential lending grew by 12.5% (£3.0 billion) during the year and credit quality remained strong with 99.0% of loans classified as neither past due nor impaired. Buy-to-let loans grew by 16.4% (£0.90 billion) to £6.4 billion and remained low as a percentage of total secured loans at 18.9% (31 December 2016:18.4%). The Group’s credit card portfolio represented 8.4% of total loans and advances to customers at 31 December 2017 (2016: 7.7%). Unsecured credit card lending increased by £584.8 million since 31 December 2016 to £3.1 billion and the quality of new business remained strong. New lending was well within approved policy, lending and concentration limits. Further details on impaired assets and impairment allowances can be found on page 143.
Credit risk categorisation Description Reference Arrears For secured lending, where the customer’s payment shortfall exceeds 1% of the current monthly contractual payment amount. For unsecured lending, customers are classified as in arrears at one day past due. Neither past due nor impaired Loans that are not in arrears and which do not meet the impaired asset definition. This segment Page 142 can include assets subject to forbearance solutions. Neither past due nor impaired Loans that are categorised as neither past due nor impaired, and are currently subject to one of Page 142 and in forbearance the defined forbearance solutions. Further information on forbearance solutions can be found on page 151. Past due and not impaired Loans that are in arrears or where there is objective evidence of impairment and the asset does Page 143 not meet the definition of impaired assets, as the expected recoverable amount exceeds the carrying amount. This category is not applicable for unsecured lending. Impaired assets Loans that are in arrears and where the carrying amount of the loan exceeds the expected Page 143 recoverable amount. All mortgage expired terms, fraud and operational risk loans are categorised as impaired irrespective of the expected recoverable amount. Unsecured lending assets are treated as impaired at one day past due. Virgin Money Group Annual Report 2017 I 141 Strategic Report Financial Results
The overall credit quality of retail assets has remained stable and is detailed in the tables below. Analysis of the movement in impaired assets is provided on page 144.
Secured Unsecured Total Residential Residential buy-to- mortgage loans let mortgage loans Credit cards Overdrafts 2017 (audited) £m % £m % £m % £m % £m % Neither past due nor 27,026.2 99.0 6,336.5 99.5 3,028.7 98.6 0.1 100.0 36,391.5 99.0 impaired > of which in receipt 133.8 0.5 15.8 0.2 3.5 0.1 – – 153.1 0.4 1
of forbearance Governance Past due and not 168.2 0.6 18.7 0.3 – – – – 186.9 0.5 impaired Impaired 122.8 0.4 12.1 0.2 42.6 1.4 – – 177.5 0.5 Total 27,317.2 100.0 6,367.3 100.0 3,071.3 100.0 0.1 100.0 36,755.9 100.0
1 This category reflects accounts which are neither past due nor impaired and subject to forbearance solutions. Accounts in this category are also included in the neither past due nor impaired categorisation. Full forbearance disclosures can be found on page 151.
Secured Unsecured Total Risk Management Report Residential Residential buy-to- mortgage loans let mortgage loans Credit cards Overdrafts 2016 (audited) £m % £m % £m % £m % £m % Neither past due nor 24,047.8 99.1 5,441.8 99.5 2,454.1 98.7 0.1 100.0 31,943.8 99.1 impaired > of which in receipt 108.6 0.4 12.2 0.2 2.9 0.1 – – 123.7 0.4 of forbearance1 Past due and not 151.3 0.6 17.6 0.3 – – – – 168.9 0.5 impaired Impaired 83.9 0.3 9.0 0.2 32.4 1.3 – – 125.3 0.4 Total 24,283.0 100.0 5,468.4 100.0 2,486.5 100.0 0.1 100.0 32,238.0 100.0 Financial Statements
1 This category reflects accounts which are neither past due nor impaired and subject to forbearance solutions. Accounts in this category are also included in the neither past due nor impaired categorisation. Forbearance disclosures have been restated to remove term extensions captured as part of the mortgage review process. Full forbearance disclosures can be found on page 151. The criteria the Group uses to determine that there is objective evidence of impairment are disclosed on page 140. All loans, where specific circumstances indicate that a loss is likely to be incurred (for example, mortgage accounts which have entered possession or loans where fraud has been confirmed), are individually assessed for impairment by reviewing expected future cash flows including those that could arise from the realisation of security. Other Information 142 I Virgin Money Group Annual Report 2017
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Loans and advances which are neither past due nor impaired Loans which were neither past due nor impaired have increased by £3.9 billion in the year to 31 December 2017 and represent 99.0% of total secured loans. The proportion of secured loans and advances classified as low risk has increased over the period from 90.9% to 99.2%. Model development work undertaken during the year, to better align the Group’s internal rating systems with portfolio performance, has led to improvements in credit quality measurements across the portfolio. In addition, third party process improvements in relation to data matching have improved the accuracy of certain customers’ risk classifications, increasing the proportion of loans classified as low risk. Additionally, new lending during the period, although having a diluting effect, showed strong arrears performance. The segmentation for low, medium and higher risk categories for the unsecured portfolio can be found on page 137. The tables below show the details of the credit quality for neither past due nor impaired loans.
Residential buy-to-let Residential mortgage loans mortgage loans Total 2017 (audited) £m % £m % £m % PD by internal ratings Low risk 26,770.5 99.1 6,322.5 99.8 33,093.0 99.2 Medium risk 220.0 0.8 11.7 0.2 231.7 0.7 Higher risk 35.7 0.1 2.3 – 38.0 0.1 Total neither past due nor impaired 27,026.2 100.0 6,336.5 100.0 33,362.7 100.0
Residential buy-to-let Residential mortgage loans mortgage loans Total 2016 (audited) £m % £m % £m % PD by internal ratings Low risk 21,565.5 89.7 5,256.8 96.6 26,822.3 90.9 Medium risk 1,699.5 7.1 172.1 3.2 1,871.6 6.3 Higher risk 782.8 3.2 12.9 0.2 795.7 2.8 Total neither past due nor impaired 24,047.8 100.0 5,441.8 100.0 29,489.6 100.0 Virgin Money Group Annual Report 2017 I 143 Strategic Report Financial Results
Loans and advances which are past due and not impaired The balance of mortgages which were past due and not impaired totalled £186.9 million at 31 December 2017. These assets represented 0.6% of secured loans at 31 December 2017 (31 December 2016: 0.6%). All unsecured assets which are past due are treated as impaired. All loans and advances which are past due and not impaired are classified as higher risk. The tables below show loans and advances which are past due and not impaired by overdue term.
Residential buy-to-let Residential mortgage loans mortgage loans Total 2017 (audited) £m % £m % £m % Up to one month 70.1 41.7 6.4 34.3 76.5 40.8
One to three months 74.3 44.2 9.9 52.9 84.2 45.1 Governance Three to six months 16.5 9.8 2.1 11.2 18.6 10.0 Over six months 7.3 4.3 0.3 1.6 7.6 4.1 Total past due and not impaired 168.2 100.0 18.7 100.0 186.9 100.0
Residential buy-to-let Residential mortgage loans mortgage loans Total 2016 (audited) £m % £m % £m % Risk Management Report Up to one month 57.1 37.8 4.3 24.4 61.4 36.4 One to three months 63.9 42.2 10.8 61.4 74.7 44.2 Three to six months 21.4 14.1 2.1 11.9 23.5 13.9 Over six months 8.9 5.9 0.4 2.3 9.3 5.5 Total past due and not impaired 151.3 100.0 17.6 100.0 168.9 100.0
Impaired assets Total impaired assets as a proportion of total assets has remained stable at 0.4% (2016: 0.4%). The Group’s definition of impaired assets includes accounts that are in arrears and accounts that may not be in arrears but are showing non-delinquency impairment indicators such as expired contractual terms or fraud. Balances with these indicators are categorised as impaired irrespective of arrears status or expected recoverable amount. Financial Statements As at 31 December 2017, the balance of impaired assets in arrears was £89.0 million1 (2016: £74.6 million)1. The remainder of the impaired assets balance relates to: > interest only expired term loans which have an average LTV of 25.8% and do not attract significant impairment provisions; and > fraud balances, which have an average LTV of 57.2%. These balances account for less than 0.1% of the portfolio, are managed at account level, and provisioning reflects the estimated credit loss associated with the individual account. The balances not in arrears but showing non-delinquency impairment indicators, by their nature, typically give rise to lower levels of loss and, as a result, attract lower levels of impairment provision. Unsecured impaired assets increased by 31.5% to £42.6 million, representing 1.4% of total unsecured loans. This is driven both by an increase in arrears balances, consistent with book growth, and by the expected seasoning of older assets on the portfolio. The performance of more recent cohorts is in line with or better than vintage cohorts at a similar stage of maturity. Arrears Other Information emergence on all cohorts remains in line with performance expectations.
1 Includes assets where the borrower’s property was in possession. 144 I Virgin Money Group Annual Report 2017
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The tables below show the movement of impaired loan balances during 2017 and 2016.
Secured Unsecured Wholesale Residential Residential buy-to-let mortgage mortgage Treasury Derivative loans loans Credit cards Overdrafts assets exposures Total 2017 (audited) £m £m £m £m £m £m £m As at 1 January 2017 83.9 9.0 32.4 – – – 125.3 Classified as impaired during 229.9 26.4 95.6 – – – 351.9 the year Transferred from impaired to (141.9) (20.4) (34.9) – – – (197.2) unimpaired Amounts written off (0.6) (0.1) (43.4) – – – (44.1) Repayments (48.5) (2.8) (7.1) – – – (58.4) As at 31 December 2017 122.8 12.1 42.6 – – – 177.5
Secured Unsecured Wholesale Residential Residential buy-to-let mortgage mortgage Treasury Derivative loans loans Credit cards Overdrafts assets exposures Total 2016 (audited) £m £m £m £m £m £m £m As at 1 January 2016 77.6 7.0 27.4 – – – 112.0 Classified as impaired during 132.3 20.4 85.0 – – – 237.7 the year Transferred from impaired to (112.9) (17.7) (38.3) – – – (168.9) unimpaired Amounts written off (0.6) (0.2) (32.3) – – – (33.1) Repayments (12.5) (0.5) (9.4) – – – (22.4) As at 31 December 2016 83.9 9.0 32.4 – – – 125.3 Virgin Money Group Annual Report 2017 I 145 Strategic Report Financial Results
An analysis of impaired assets by overdue term and assets where the borrower’s property was in possession is provided in the tables below. All impaired loans and advances are classified as higher risk.
Residential mortgage Residential buy-to-let loans mortgage loans Credit cards Overdrafts Total 2017 (audited) £m % £m % £m % £m % £m % Up to date 80.3 65.5 7.9 65.3 0.3 0.7 – – 88.5 49.8 Up to one month 17.6 14.3 0.8 6.6 15.5 36.3 – – 33.9 19.1 One to three 20.4 16.6 2.7 22.3 13.4 31.5 – – 36.5 20.6 months
Three to six 2.5 2.0 0.3 2.5 13.1 30.8 – – 15.9 9.0 Governance months Over six months 1.5 1.2 0.3 2.5 0.3 0.7 – – 2.1 1.2 Possession 0.5 0.4 0.1 0.8 – – – – 0.6 0.3 Total impaired 122.8 100.0 12.1 100.0 42.6 100.0 – – 177.5 100.0 assets
Residential mortgage Residential buy-to-let loans mortgage loans Credit cards Overdrafts Total Risk Management Report 2016 (audited) £m % £m % £m % £m % £m % Up to date 45.7 54.5 4.9 54.5 0.1 0.3 – – 50.7 40.4 Up to one month 10.0 11.9 1.3 14.5 13.1 40.5 – – 24.4 19.5 One to three 19.9 23.7 2.2 24.4 9.3 28.7 – – 31.4 25.1 months Three to six 4.1 4.9 0.3 3.3 9.6 29.6 – – 14.0 11.2 months Over six months 3.9 4.6 0.2 2.2 0.3 0.9 – – 4.4 3.5 Possession 0.3 0.4 0.1 1.1 – – – – 0.4 0.3 Total impaired 83.9 100.0 9.0 100.0 32.4 100.0 – – 125.3 100.0 assets Financial Statements Other Information 146 I Virgin Money Group Annual Report 2017
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Impairment provisions Secured impairment provisions have increased by £1.5 million, in line with book growth, representing 0.04% as a proportion of gross balances as at 31 December 2017 and 31 December 2016. Secured impairment coverage has fallen from 11.4% at 31 December 2016, to 9.0% as at 31 December 2017 due to the impact of expired term and fraud loan balances. Unsecured impairment provisions increased by £7.8 million during the period and have reduced as a percentage of gross balances from 1.59% at 31 December 2016 to 1.54% at 31 December 2017. Impairment provisions as a proportion of impaired balances decreased, from 121.9% to 111.0% during the year. The reduction in impairment provision coverage is a result of improved debt recovery rates, which reduces the estimated credit loss attributable to these assets. The tables below show impaired assets and impairment provisions.
Impairment Impaired provisions balances as as a % of Gross Impaired a % of gross Impairment impaired balances balances balances provisions balances 2017 (audited) £m £m % £m % Residential mortgage loans 27,317.2 122.8 0.4 10.8 8.8 Residential buy-to-let mortgage loans 6,367.3 12.1 0.2 1.3 10.7 Total secured 33,684.5 134.9 0.4 12.1 9.0 Credit cards 3,071.3 42.6 1.4 47.2 110.8 Overdrafts 0.1 – – 0.1 – Total unsecured 3,071.4 42.6 1.4 47.3 111.0 Wholesale treasury assets 3,990.5 – – – – Wholesale derivative exposures 78.8 – – – – Total wholesale 4,069.3 – – – – Total 40,825.2 177.5 0.4 59.4 33.5
Impairment Impaired provisions balances as as a % of Gross Impaired a % of gross Impairment impaired balances balances balances provisions balances 2016 (audited) £m £m % £m % Residential mortgage loans 24,283.0 83.9 0.3 9.4 11.2 Residential buy-to-let mortgage loans 5,468.4 9.0 0.2 1.2 13.3 Total secured 29,751.4 92.9 0.3 10.6 11.4 Credit cards 2,486.5 32.4 1.3 39.4 121.6 Overdrafts 0.1 – – 0.1 – Total unsecured 2,486.6 32.4 1.3 39.5 121.9 Wholesale treasury assets 2,281.4 – – – – Wholesale derivative exposures 104.2 – – – – Total wholesale 2,385.6 – – – – Total 34,623.6 125.3 0.4 50.1 40.0 Virgin Money Group Annual Report 2017 I 147 Strategic Report Financial Results
The table below shows the movement of impairment provisions during the year.
Secured Unsecured Wholesale On advances On advances secured on secured on residential residential buy-to-let Treasury Derivative property property Credit cards Overdrafts assets exposures Total £m £m £m £m £m £m £m As at 1 January 2016 7.7 1.0 31.1 0.1 – – 39.9 Advances written off (0.6) (0.2) (26.6) – – – (27.4)
Gross charge to the income 2.3 0.4 34.9 – – – 37.6 Governance statements As at 1 January 2017 9.4 1.2 39.4 0.1 – – 50.1 Advances written off (0.6) (0.1) (34.2) – – – (34.9) Gross charge to the income 2.0 0.2 42.0 – – – 44.2 statement As at 31 December 2017 10.8 1.3 47.2 0.1 – – 59.4 Of the total allowance in respect of loans and advances to customers, £57.5 million (2016: £49.4 million) was assessed on a Risk Management Report collective basis. Collateral held as security for loans and receivables to customers A general description of collateral held as security in respect of financial instruments is provided on page 136. The Group holds collateral against loans and receivables in the mortgage portfolio. Quantitative and, where appropriate, qualitative information is provided in respect of this collateral on page 149. The Group holds collateral in respect of loans and advances to customers as set out on page 136. The Group does not hold collateral against debt securities, comprising asset-backed securities and corporate and other debt securities, which are classified as loans and receivables. The tables overleaf show the distribution of retail secured loans by LTV banding. Financial Statements Other Information 148 I Virgin Money Group Annual Report 2017
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Residential buy-to-let Residential mortgage loans mortgage loans Total 2017 (audited) £m % £m % £m % <50% 10,249.6 37.6 2,293.5 36.1 12,543.1 37.2 50%-<60% 5,362.9 19.6 1,851.5 29.1 7,214.4 21.4 60%-<70% 4,508.4 16.5 1,441.4 22.6 5,949.8 17.7 70%-<80% 4,022.9 14.7 778.1 12.2 4,801.0 14.3 80%-<90% 2,725.7 10.0 1.9 – 2,727.6 8.1 90%-<100% 444.6 1.6 0.6 – 445.2 1.3 >100% 3.1 – 0.3 – 3.4 – Total 27,317.2 100.0 6,367.3 100.0 33,684.5 100.0 Average LTV1 of stock – indexed 56.1% 54.1% 55.8% Average LTV of new business 70.0% 59.7% 68.1%
1 The average LTV of stock and new business is balance weighted.
Residential buy-to-let Residential mortgage loans mortgage loans Total 2016 (audited) £m % £m % £m % <50% 9,476.6 39.1 1,922.8 35.2 11,399.4 38.3 50%-<60% 4,958.1 20.4 1,454.8 26.6 6,412.9 21.6 60%-<70% 3,918.9 16.1 1,271.8 23.3 5,190.7 17.4 70%-<80% 3,162.8 13.0 796.4 14.6 3,959.2 13.3 80%-<90% 2,307.7 9.5 19.0 0.3 2,326.7 7.8 90%-<100% 445.1 1.8 2.2 – 447.3 1.5 >100% 13.8 0.1 1.4 – 15.2 0.1 Total 24,283.0 100.0 5,468.4 100.0 29,751.4 100.0 Average LTV1 of stock – indexed 55.6% 54.8% 55.4% Average LTV of new business 69.8% 60.5% 68.0%
1 The average LTV of stock and new business is balance weighted. The average indexed LTV of the overall mortgage portfolio increased by 0.4 percentage points as at 31 December 2017. This is well within the current Group portfolio risk appetite limit of 70%. The average LTV for new business remained broadly flat at 68.1% as at 31 December 2017. Virgin Money Group Annual Report 2017 I 149 Strategic Report Financial Results
Collateral held in relation to secured loans is capped at the amount outstanding on an individual loan basis. The percentages in the tables below represent the value of collateral, capped at loan amount, divided by the total loan amount in each category.
Collateral value of Collateral value of residential buy-to-let residential mortgage loans mortgage loans Total collateral value 20171 (audited) £m % £m % £m % Neither past due nor impaired 27,025.9 100.0 6,336.5 100.0 33,362.4 100.0 > of which in receipt of forbearance 133.8 100.0 15.8 100.0 149.6 100.0 Past due and not impaired 168.2 100.0 18.7 100.0 186.9 100.0 Impaired 122.8 100.0 12.1 100.0 134.9 100.0 Governance > of which in possession 0.5 100.0 0.1 100.0 0.6 100.0 Total 27,316.9 100.0 6,367.3 100.0 33,684.2 100.0
1 Some segments may appear fully collateralised due to immaterial balances in negative equity. Due to rounding these do not change the overall collateralised percentage shown.
Collateral value of Collateral value of residential buy-to-let residential mortgage loans mortgage loans Total collateral value
1 2016 (audited) £m % £m % £m % Risk Management Report Neither past due nor impaired 24,046.6 100.0 5,441.7 100.0 29,488.3 100.0 > of which in receipt of forbearance2 108.6 100.0 12.2 100.0 120.8 100.0 Past due and not impaired 151.3 100.0 17.6 100.0 168.9 100.0 Impaired 83.7 99.8 9.0 100.0 92.7 99.8 > of which in possession 0.3 100.0 0.1 100.0 0.4 100.0 Total 24,281.6 100.0 5,468.3 100.0 29,749.9 100.0
1 Some segments may appear fully collateralised due to immaterial balances in negative equity. Due to rounding these do not change the overall collateralised percentage shown. 2 Forbearance disclosures have been restated to exclude term extensions captured as part of the mortgage review process. Further details can be found on page 151. As at 31 December 2017, there was £0.3 million (2016: £1.4 million) excess between the balance of residential mortgage loans with a LTV of greater than 100% and the collateral held against them. All these mortgage balances were classified as neither Financial Statements past due nor impaired (2016: £1.2 million). The recoverable amount used for impairment provision purposes reflects this level of collateral. Repossessions The Group works with customers who have difficulty paying their mortgages, and will repossess a property only when all other possibilities have been exhausted. Where properties have been repossessed, the Group will obtain the best price, taking into account factors such as property and market conditions. The Group uses external asset management specialists to realise the value as soon as practicable to settle indebtedness. Any surplus funds are returned to the borrower or are otherwise dealt with in accordance with appropriate insolvency regulations. The Group held ten repossessed properties as at 31 December 2017 compared to six as at 31 December 2016. The total number of properties taken into possession during the year reduced to 12, from 36 in 2016. Other Information 150 I Virgin Money Group Annual Report 2017
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Interest only mortgages The Group provides interest only mortgages to customers, whereby payments made by the customer comprise interest for the term of the mortgage, with the customer responsible for repaying the principal outstanding at the end of the loan term. The tables below provide details of balances which are on an interest only basis, analysed by maturity. This includes the interest only balances for loans that provide the customer with the flexibility to choose to pay a proportion of the loan on a capital repayment basis and a proportion on interest only (part-and-part loans). The Group’s interest only exposure for customers on both interest only and part-and-part for the year to 31 December 2017 reduced to 27.6% of total secured balances, from 29.9% at 31 December 2016.
Residential Residential buy-to-let mortgage mortgage loans loans Total 2017 (audited) £m £m £m Term expired (still open) 46.0 3.5 49.5 Due within 2 years 156.2 16.3 172.5 Due after 2 years and before 5 years 432.0 112.4 544.4 Due after 5 years and before 10 years 1,047.5 677.4 1,724.9 Due after more than 10 years 2,296.9 4,499.4 6,796.3 Total 3,978.6 5,309.0 9,287.6 > of which are impaired 11.1 61.4 72.5 % of total secured loans and advances to customers 14.6 83.4 27.6 Average LTV (%) 40.6 55.2 49.5
Residential Residential buy-to-let mortgage mortgage loans loans Total 2016 (audited) £m £m £m Term expired (still open) 30.1 1.9 32.0 Due within 2 years 167.5 16.4 183.9 Due after 2 years and before 5 years 405.2 77.8 483.0 Due after 5 years and before 10 years 1,012.9 591.8 1,604.7 Due after more than 10 years 2,726.0 3,852.6 6,578.6 Total 4,341.7 4,540.5 8,882.2 > of which are impaired 8.6 47.8 56.4 % of total secured loans and advances to customers 17.9 83.0 29.9 Average LTV (%) 42.1 55.8 49.6 Virgin Money Group Annual Report 2017 I 151 Strategic Report Financial Results
The Group contacts customers who have an interest only Forbearance mortgage scheduled to mature within the next ten years, The Group operates a number of treatments to assist to confirm that their strategy to repay the mortgage loan borrowers who are experiencing financial distress. In defining in full at the end of the agreed term remains on track. If these treatments, the Group distinguishes between the not, the Group will discuss a range of options, including a following categories for secured assets: mortgage review, to ensure the customers’ individual needs > payment arrangements: a temporary arrangement for continue to be met. customers in financial distress where arrears accrue at the Interest only balances due to mature in the next two years contractual payment, for example, short-term arrangements represent 1.9% of total interest only balances, totalling to pay less than the contractual payment; £172.5 million at 31 December 2017. The increase in > transfers to interest only: an account change to assist interest only expired term loans of £17.5 million is in line customers through periods of financial difficulty where arrears Governance with expectations. Strategies exist to help customers do not accrue at the original contractual payment. Any arrears who may not be able to repay the full amount of principal of capital repayment existing at the commencement of the balance at maturity. arrangement remain outstanding; All expired term balances are categorised as impaired loans, > term extensions: a permanent account change for customers regardless of estimated credit loss. Less than 0.2% of the in financial distress where the overall term of the mortgage is secured portfolio relates to expired term loan balances. extended, resulting in a lower contractual monthly payment; The average balance of expired term loans which are more and than six months past their maturity date is £87,573 with an Risk Management Report average LTV of 25.8%. > discretionary payment holidays: a temporary account change to assist customers through periods of financial difficulty The Group offers interest only loans to applicants who have where arrears do not accrue at the original contractual credible means to repay the mortgage loan at maturity payment. other than sale of main residence. The flow of new interest only residential balances has remained low during 2017, Loans which are subject to forbearance are grouped with representing 2.2% of residential completions. As a result, the other assets with similar risk characteristics and assessed proportion of residential interest only mortgages (excluding collectively for impairment. Loans are not considered as part-and-part) in the portfolio continues to reduce, moving impaired loans unless they meet the Group’s definition of an from 15.0% to 12.3% during 2017. impaired asset. The Group regularly reviews the effectiveness of its interest only policy and contact strategies. Financial Statements
Other Information 152 I Virgin Money Group Annual Report 2017
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The value of forbearance stock totalled £176.4 million at 31 December 2017 (2016: £141.3 million). £161.2 million (31 December 2016: £128.6 million) of retail secured loans and advances were subject to forbearance, representing 0.48% of total secured loans and advances (2016: 0.43%). This increase in forbearance is consistent with portfolio growth and reflects the Group’s focus on proactive debt management due to the low level of arrears emergence. During 2017, the Group amended its secured forbearance capture to exclude routine term extensions processed as part of the mortgage review process, where there is no forbearance. Such cases had been captured prudently as forborne in prior reporting periods. The 2016 comparative has been restated to reflect this change. The tables below show analysis by forbearance category.
Neither past due Past due not impaired Impaired Total nor impaired 2017 (audited) £m % £m % £m % £m % Secured Payment arrangement 0.6 0.5 1.4 15.7 – – 2.0 1.2 Transfer to interest only 29.2 19.5 1.4 15.7 0.3 11.1 30.9 19.2 Term extension 59.0 39.4 3.2 36.0 2.1 77.8 64.3 39.9 Payment holiday 60.8 40.6 2.9 32.6 0.3 11.1 64.0 39.7 Total secured forbearance 149.6 100.0 8.9 100.0 2.7 100.0 161.2 100.0 Unsecured Accounts where the customer 3.5 100.0 – – 11.7 100.0 15.2 100.0 has been approved on a repayment plan Total forbearance 153.1 100.0 8.9 100.0 14.4 100.0 176.4 100.0
Neither past due nor Past due not impaired Impaired Total impaired 2016 (audited) £m % £m % £m % £m % Secured Payment arrangement 0.1 0.1 0.6 11.0 0.2 8.7 0.9 0.7 Transfer to interest only 21.8 18.0 1.8 32.7 0.6 26.1 24.2 18.8 Term extension 44.5 36.9 1.9 34.5 0.8 34.8 47.2 36.8 Payment holiday 54.4 45.0 1.2 21.8 0.7 30.4 56.3 43.8 Total secured forbearance 120.8 100.0 5.5 100.0 2.3 100.0 128.6 100.0 Unsecured Accounts where the customer 2.9 100.0 – – 9.8 100.0 12.7 100.0 has been approved on a repayment plan Total forbearance 123.7 100.0 5.5 100.0 12.1 100.0 141.3 100.0 Virgin Money Group Annual Report 2017 I 153 Strategic Report Financial Results
Wholesale credit risk Wholesale credit risk exposures increased by £1.7 billion during the year to £4.1 billion at 31 December 2017. This partly reflects the replacement of off-balance sheet liquidity from the Bank of England’s Funding for Lending Scheme (FLS) with on-balance sheet liquidity. The table below shows the wholesale credit risk exposures of the Group. Reserves placed with the Bank of England are included as wholesale credit exposures within the table.
2017 2016 (audited) £m £m Loans and advances to banks excluding Bank of England 359.4 635.6 Bank of England 2,579.0 786.3
Debt securities classified as loans and receivables 0.3 0.7 Governance Debt securities classified as available-for-sale financial assets 1,048.7 850.9 Gross positive fair value of derivative contracts 78.8 104.2 Total 4,066.2 2,377.7 The Group has increased its holdings of high-quality available-for-sale wholesale assets during the year including gilts, supranational, covered bonds and RMBS investments. Wholesale credit risk exposures are assessed by reference to credit rating. All of the Group’s wholesale exposures were investment grade and classified as low risk at 31 December 2017. Full disclosure of the Group’s portfolio of liquid assets can be found on page 176. Risk Management Report At 31 December 2017, the single largest exposure to any single counterparty, which is not a sovereign or a supranational, was £108.4 million (2016: £115.9 million). The table below shows the credit ratings of loans and advances to banks excluding the Bank of England, which has a credit rating of AA (2016: AA).
2017 2016 (audited) £m £m AA+ – 56.8 AA- 100.3 115.9 A+ 145.5 208.4 A 79.4 187.4 A- 14.8 35.2 Financial Statements BBB+ 19.4 31.9 Total 359.4 635.6 Other Information 154 I Virgin Money Group Annual Report 2017
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The table below shows debt securities classified as loans and receivables and debt securities classified as available-for-sale financial assets.
2017 2016 Debt Debt securities securities Debt classified as Debt classified as securities available- securities available- classified as for-sale classified as for-sale loans and financial loans and financial receivables assets receivables assets (audited) £m £m £m £m UK sovereign exposures – 356.7 – 317.3 Supranational – 234.1 – 129.3 Residential mortgage-backed securities 0.3 61.4 0.7 52.2 Covered bonds – 396.5 – 327.1 Debt securities issued by banks – – – 25.0 Total 0.3 1,048.7 0.7 850.9
The table below shows the credit rating of debt securities classified as loans and receivables and debt securities classified as available-for-sale financial assets.
2017 2016 (audited) £m £m AAA 692.0 508.6 AA+ – – AA 356.7 317.3 AA- – 25.0 A+ – – A 0.3 0.7 Total 1,049.0 851.6
The credit rating of the debt securities remains high, with 100.0% rated AA or higher at 31 December 2017 (2016: 97.0%). Virgin Money Group Annual Report 2017 I 155 Strategic Report Financial Results
Derivative financial instruments The Group reduces exposure to credit risk through central clearing for eligible derivatives and daily posting of cash collateral on such transactions, as detailed in notes 13 and 33 to the financial statements. For derivatives not eligible for central clearing, exposure is reduced by the use of master netting agreements and by obtaining collateral in the form of cash or highly liquid securities. In respect of the Group’s maximum credit risk relating to derivative assets of £78.8 million (2016: £104.2 million), collateral of £84.4 million (2016: £86.4 million) was held. The Group measures exposure in derivatives using the gross positive fair value of contracts outstanding with a counterparty, increased by potential future rises in fair value and reduced by gross negative fair value of contracts and collateral received. While exposures are managed on a net basis, they are represented on the balance sheet on a gross basis unless the IAS 32 offsetting rules are met. Derivative contracts which do not meet the IAS 32 offsetting rules, and have positive fair values, are disclosed as assets in the balance sheet. Those with negative fair values are disclosed as liabilities. Governance Cash collateral received is classified as deposits from banks, and cash collateral posted is classified as loans and advances to banks. The notes to the financial statements provide further information on collateral. The table below details derivative exposures, excluding those that are centrally cleared.
2017 2016 (audited) £m £m Gross positive fair value of derivative contracts 78.8 104.2 Netting with gross negative fair value of derivative contracts1 (11.5) (25.4) Risk Management Report Potential future incremental exposure 47.3 61.2 Collateral received (deposits from banks) (84.4) (86.4) Net derivative exposures 30.2 53.6
1 The use of netting allows positions on all bilateral transactions with any given counterparty to be offset. The table below provides a summary of net derivative liabilities, excluding those that are centrally cleared.
2017 2016 (audited) £m £m Gross negative fair value of derivative contracts (84.3) (222.3)
1 Netting with gross positive fair value of derivative contracts 11.5 25.4 Financial Statements Collateral pledged (loans and advances to banks) 74.6 168.1 Net derivative liability 1.8 (28.8)
1 The use of netting allows positions on all bilateral transactions with any given counterparty to be offset. The only netting agreements in place are in relation to derivative financial instruments and repurchase transactions. In respect of repurchase transactions, only the difference between the asset pledged and deposit received is classed as an exposure given the balance sheet maintains the exposure to the underlying obligor. Other Information 156 I Virgin Money Group Annual Report 2017
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The table below provides credit quality analysis of the gross derivative exposures, excluding those that are centrally cleared, by credit rating of the counterparties.
2017 2016 (audited) £m % £m % AA- 1.7 2.2 5.6 5.4 A+ 6.5 8.2 0.6 0.6 A 67.0 85.0 84.5 81.1 A- 0.3 0.4 12.7 12.2 BBB+ 0.2 0.3 0.8 0.7 NR 3.1 3.9 – – Total 78.8 100.0 104.2 100.0 Virgin Money Group Annual Report 2017 I 157 Strategic Report Financial Results
Market risk Swap spread risk arises through the hedging of the repricing Definition risk of fixed rate securities (e.g. gilt securities) with derivatives. Market risk is defined as the risk that the value of, or net The yields in securities and swap markets for a given tenor income arising from, assets and liabilities changes as a result may not change by the same amount as each other. Such of interest rate or exchange rate movements. Market risk for differences cause spread risk to arise. the Group arises as a natural consequence of carrying out and Foreign currency risk arises as a result of having assets, supporting core business activities. The Group does not trade liabilities and derivative items denominated in currencies or make markets and transacts foreign exchange for limited other than Sterling as a result of banking activities. The Group operational purposes only. As a result, interest rate risk is the has minimal exposure to foreign currency risk. only material market risk for the Group. Measurement Risk appetite The Group quantifies the impact to economic value and Governance The Group has limited risk appetite for exposures to earnings arising from a shift to interest rates using stress interest rate risk in the banking book (IRRBB), in terms of scenarios. These scenarios examine the interest rate re- both potential changes to economic value, and changes to pricing gaps, asset and liability interest rate bases and expected net interest income or earnings. Risk appetite limits product optionality. and metrics are set with reference to stress scenarios using The Group maintains IRRBB management practices in line with measures described in this section. applicable regulatory expectations. Exposures Interest rate risk exposure is measured as follows:
The Group’s banking activities expose it to the risk of adverse Risk Management Report movements in interest rates and exchange rates. > Capital at Risk (CaR) is considered for assets and liabilities in all interest rate risk re-pricing periods. This is expressed as the Term mismatch risk in the Group’s portfolio arises from the present value of the negative impact of a sensitivity test on the different re-pricing characteristics of the Group’s assets, Group’s capital position. liabilities and off-balance sheet exposures. Term mismatch risk arises predominantly from the mismatch between assets > Earnings at Risk (EaR) is considered for assets and liabilities on and liabilities either maturing or the amount resetting in the forecast balance sheet over a 12 month period, measuring any given time period, and the investment term of capital the adverse change to net interest income from a change in and reserves, and the need to stabilise earnings in order to interest rates. minimise income volatility. IRRBB is measured considering both positive and negative Basis risk arises from possible changes in spreads, between instantaneous shocks to interest rates. The measurement is enhanced with non-parallel stress scenarios (basis risk), swap different reference rates, for example, where assets and Financial Statements liabilities reprice at the same time and the scale of rate spread risk and behavioural volume stresses (pipeline and movement differs. The Group is exposed to Bank Base optionality risk). Both EaR and CaR are controlled by a defined Rate and LIBOR. If the spread between these rates moves risk appetite limit and supporting metrics. adversely, the Group may experience a reduction in income on CaR measurements are based on a 2% parallel stress over the unhedged exposures. balance sheet horizon, for term mismatch. EaR measurements Pipeline risk arises where new business volumes are higher are based on a 1% parallel stress over a 12 month period. The or lower than forecast, requiring the business to unwind or stress scenarios capture the risk of negative interest rates. execute additional hedging at rates unfavourable to those The magnitude of stress used within the Group’s internal that were expected. Variations in business volume outturn risk appetite differs from the standardised regulatory stress, to forecast arise from changes in customer behaviour and based on observed rate movements and internally defined relative product competitiveness. exposure holding periods. In the case of basis risk, the Group Other Information uses an internal stress test outcome for CaR and EaR. Product optionality risk arises when customer balances reduce more quickly or slowly than anticipated due to economic conditions or customers’ responses to changes in interest rates or other economic conditions differing from expectations. 158 I Virgin Money Group Annual Report 2017
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The Group has an integrated Asset and Liability Management The Group is exposed to fair value interest rate risk on fixed system which allows it to measure and manage interest rate rate customer loans and deposits and to cash flow interest re-pricing profiles (including behavioural assumptions), rate risk on variable rate loans and deposits. Accounting perform stress testing and produce forecasts. methodology for derivative financial instruments and hedge Mitigation accounting is captured within the notes to the consolidated The Group uses derivative financial instruments to bring its financial statements. residual net exposure within risk appetite. The residual net Monitoring exposure takes account of natural offsets between assets Interest rate risk is monitored centrally on a day-to-day and liabilities. basis using the measures described above and other key As defined within the scope of the Group’s IRRBB Policy, the risk indicators. Interest Rate Risk Transfer Pricing framework is used for The Asset and Liability Committee and the Risk Management interest rate risk arising from commercial product lines that Committee regularly review market risk exposure as part can be hedged. Treasury is responsible for managing risk of the wider risk management framework. The Asset and and does this through natural offsets of matching assets and Liability Committee reviews and approves strategies to liabilities where possible. manage IRRBB. Appropriate hedging activity of residual exposures is Capital at Risk undertaken, subject to the authorisation and mandate of the CaR as at 31 December 2017 increased to £25.5 million from Asset and Liability Committee, within the Board-approved risk £14.1 million at 31 December 2016 in a negative rate shock appetite. Certain residual interest rate risks may remain due scenario. In a positive rate shock scenario, it increased to to differences in basis and profile mismatches arising from £52.2 million at 31 December 2017 from £34.2 million as at customer behaviour. 31 December 2016. In both rate shock scenarios this was due Where possible, the Group mitigates basis risk by creating to the increase in the balance sheet, and the consequential natural offsets. When required, the Group uses basis increase in interest rate mismatch risk, and optionality derivatives to maintain the residual exposure within risk arising from the increase in potential mortgage early risk appetite. repayments and savings redemptions. The table below shows CaR measurements, based on a 2% parallel stress over the balance sheet horizon.
2017 2016 Positive Negative Positive Negative 2% rate 2% rate 2% rate 2% rate shock shock shock shock £m £m £m £m Interest rate mismatch risk (6.3) 0.4 1.6 0.7 Basis Risk (1.4) (1.4) – – Pipeline risk (4.7) (5.5) (5.7) (7.1) Optionality risk (39.8) (19.0) (30.1) (7.7) Total interest rate risk – Capital at Risk (52.2) (25.5) (34.2) (14.1) Virgin Money Group Annual Report 2017 I 159 Strategic Report Financial Results
Earnings at Risk EaR has decreased over the year by £36.1 million in a positive rate shock scenario and by £11.9 million in a negative rate shock scenario. These improvements are due to the Group’s savings pricing strategy and changes in customer terms and conditions, which has benefited interest rate mismatch risk. Additionally, the further utilisation of basis swapped positions has reduced the level of basis risk arising in these rate shock scenarios. The table below shows that, due to reductions in the structural mismatches of assets and liabilities on the balance sheet across the year, the Group’s net interest income at 31 December 2017 is significantly less likely to suffer from a large, sudden shock to interest rates than it was at 31 December 2016.
2017 2016
Positive Negative Positive Negative Governance 1% rate 1% rate 1% rate 1% rate shock shock shock shock £m £m £m £m Interest rate mismatch risk 21.3 2.2 (1.7) (1.4) Basis risk (0.1) (9.0) (10.4) (17.6) Pipeline risk (2.5) (1.3) (3.0) (2.3) Optionality risk (6.3) (1.6) (8.6) (0.3)
Total interest rate risk – Earnings at Risk 12.4 (9.7) (23.7) (21.6) Risk Management Report
Foreign currency assets and liabilities Exposures to adverse changes in currency exchange rates have been reduced by using cross-currency swaps, resulting in a minimal net exposure. The table below shows assets and liabilities in foreign currency at Sterling carrying values.
2017 2016 (audited) US$ in £m € in £m US$ in £m € in £m Assets Loans and advances to banks 0.7 0.9 0.7 0.9 Available-for-sale financial assets 1.4 54.0 1.5 – Intangible assets 0.1 0.1 0.1 0.1 Financial Statements Other assets – 0.6 – 0.4 Total assets 2.2 55.6 2.3 1.4 Liabilities Debt securities in issue 377.0 387.0 175.7 412.4 Other liabilities 0.7 0.5 0.4 0.5 Total liabilities 377.7 387.5 176.1 412.9 Notional value of derivatives affecting currency exposures (375.4) (332.9) (174.1) (412.4) Net position (0.1) 1.0 0.3 0.9 Other Information 160 I Virgin Money Group Annual Report 2017
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Interest rate re-pricing of assets and liabilities The following tables provide an analysis of the contractual re-pricing periods of assets and liabilities on the balance sheet. Mismatches in the re-pricing timing of assets, liabilities, and off-balance sheet positions create interest rate risk quantified in CaR and EaR.
After After 3 months 6 months After 1 year Non-interest Within and within and within and within After bearing 3 months 6 months 1 year 5 years 5 years instruments Total 20171 (audited) £m £m £m £m £m £m £m Assets Cash and balances at central 2,521.3 – – – – 57.7 2,579.0 banks Loans and receivables: Loans and advances to banks 352.0 – – – – 7.4 359.4 Loans and advances to 7,281.3 2,137.5 4,843.8 21,650.2 532.8 294.6 36,740.2 customers Debt securities 0.3 – – – – – 0.3 Available-for-sale financial assets 406.8 13.1 5.0 122.8 444.8 59.3 1,051.8 Other assets (32.5) – – – – 409.6 377.1 Total assets 10,529.2 2,150.6 4,848.8 21,773.0 977.6 828.6 41,107.8 Liabilities Deposits from banks 5,379.0 – – – – – 5,379.0 Customer deposits 17,022.0 2,256.0 5,275.7 6,245.5 0.6 8.6 30,808.4 Debt securities in issue 2,439.3 – – 300.0 – (2.4) 2,736.9 Other liabilities – – – – – 358.6 358.6 Equity – – – 390.0 – 1,434.9 1,824.9 Total liabilities and equity 24,840.3 2,256.0 5,275.7 6,935.5 0.6 1,799.7 41,107.8 Notional values of derivatives 12,799.6 676.0 674.8 (12,749.6) (1,343.6) (57.2) – affecting interest rate sensitivity Total interest rate sensitivity gap (1,511.5) 570.6 247.9 2,087.9 (366.6) (1,028.3) – Cumulative interest rate (1,511.5) (940.9) (693.0) 1,394.9 1,028.3 – – sensitivity gap
1 Items are allocated to time bands in the table above by reference to the earlier of the next contractual interest rate re-pricing date and the residual maturity date. Virgin Money Group Annual Report 2017 I 161 Strategic Report Financial Results
After 3 months After After 1 year Non-interest Within and within 6 months and and within After bearing 3 months 6 months within 1 year 5 years 5 years instruments Total 20161 (audited) £m £m £m £m £m £m £m Assets Cash and balances at central 732.0 – – – – 54.3 786.3 banks Loans and receivables: Loans and advances to banks 630.1 – – – – 5.5 635.6
Loans and advances to 8,074.2 1,871.1 3,425.2 18,365.1 298.5 333.0 32,367.1 Governance customers Debt securities 0.7 – – – – – 0.7 Available-for-sale financial assets 212.9 – – 154.5 426.0 65.4 858.8 Other assets 54.0 – – – – 353.1 407.1 Total assets 9,703.9 1,871.1 3,425.2 18,519.6 724.5 811.3 35,055.6 Liabilities
Deposits from banks 2,132.5 – – – – – 2,132.5 Risk Management Report Customer deposits 18,027.5 1,157.1 4,081.4 4,810.2 – 30.1 28,106.3 Debt securities in issue 2,299.9 – – 300.0 – 0.1 2,600.0 Other liabilities – – – – – 546.3 546.3 Equity – – – 390.0 – 1,280.5 1,670.5 Total liabilities and equity 22,459.9 1,157.1 4,081.4 5,500.2 – 1,857.0 35,055.6 Notional values of derivatives 10,864.0 (548.2) 1,388.0 (10,395.4) (1,240.7) (67.7) – affecting interest rate sensitivity Total interest rate sensitivity gap (1,892.0) 165.8 731.8 2,624.0 (516.2) (1,113.4) – Cumulative interest rate (1,892.0) (1,726.2) (994.4) 1,629.6 1,113.4 – – sensitivity gap Financial Statements
1 Items are allocated to time bands in the table above by reference to the earlier of the next contractual interest rate re-pricing date and the residual maturity date. The interest rate re-pricing tables shown above reflect the re-pricing of assets and liabilities without adjustments to the re- pricing profile that reflect future pricing assumptions. Expected future business that the Group hedges ahead of entering into a customer contract is not taken into account. The Group manages interest rate risk on this basis. Therefore, the gap profile shown above does not directly translate to the CaR and EaR term mismatch quantification. Other Information 162 I Virgin Money Group Annual Report 2017
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Operational risk Definition Mitigation Operational risk is defined as the risk of loss resulting from The Group’s control environment is regularly reviewed inadequate or failed internal processes, people and systems or and reporting on material risks is discussed monthly by from external events. It also includes legal risk. Senior Management. Risks are managed through a range of Risk appetite strategies such as mitigation, transfer (including insurance), The Group’s operational risk appetite is designed to safeguard and acceptance. Contingency plans are maintained for a range the interests of customers, internal and external stakeholders, of potential scenarios with regular disaster recovery exercises. and shareholders. Mitigating actions for the principal risks include: Exposures > investment in IT infrastructure to ensure continued The principal operational risks to the Group are: availability, security and resilience; > IT systems and resilience risk arising from failure to develop, > investment in information security capability to protect deliver and maintain effective IT solutions; customers and the Group; > information security risk arising from information leakage, > investment in the protection of customer information, loss or theft; including access to key systems and the security, durability > external fraud arising from an act of deception or omission; and accessibility of critical records; > cyber-crime arising from malicious attacks on the Group via > a risk-based approach to mitigate the financial crime risks the technology, networks and systems; Group faces, reflecting the current and emerging financial crime risks within the market. The Group has developed a > service disruption; comprehensive financial crime operating model. The Group’s > failure of a third party corporate partner or strategic supplier; fraud awareness programme is a key component of the and financial crime control environment; and > normal business operational risk including transaction > operational resilience measures and recovery planning processing, information capture and implementation of to ensure an appropriate and consistent approach to change. the management of continuity risks, including potential interruptions from a range of internal and external incidents Measurement or threats. A variety of measures are used to monitor operational risk, such as scoring of potential risks, considering impact Monitoring and likelihood, assessing the effectiveness of controls, Monitoring and reporting of operational risk is undertaken monitoring of events and losses by size, functional area at Board and Executive Committees. A combination of and internal risk categories. The Group maintains a formal systems, monthly reports, oversight and challenge from the approach to operational risk event escalation. Material Risk function, Internal Audit and assurance teams ensures events are identified, captured and escalated. The root cause that key risks are regularly presented and considered by of events are determined and action plans put in place to Executive management. ensure an optimum level of control. This ensures the Group Key operational risks are appropriately insured, where keeps customers and the business safe, reduces costs, and possible. The insurance programme is monitored and improves efficiency. reviewed regularly, with recommendations made to Executive management prior to each renewal.
Virgin Money Group Annual Report 2017 I 163 Strategic Report Financial Results
Conduct risk and compliance Definition Mitigation Conduct risk and compliance is defined as the risk that the The Group takes a range of mitigating actions with respect to Group’s operating model, culture or actions result in unfair conduct risk and compliance. They include: outcomes for customers, and the risk of regulatory sanction, > promoting a culture throughout the business that places the material financial loss or reputational damage if the Group customer at the heart of decision-making, business planning fails to design and implement effective operational processes, and culture; systems and controls and maintain compliance with all applicable regulatory requirements. > policies, processes and standards which provide a framework for the business to operate in accordance with the relevant Risk appetite laws and regulations; The Group has no appetite for failure to remediate regulatory Governance breaches and no tolerance for failing to deliver fair customer > using a risk assessment framework that ensures product outcomes, whether through product design, sales or after design and sales processes offer customers value for money, sales processes. meet the needs of the target market, and deliver fair outcomes to customers, including vulnerable customers; Exposures The Group manages conduct risk in relation to products and > focusing on recruitment and training and how the Group services, sales processes and complaint handling. manages colleagues’ performance in relation to fair customer outcomes; A series of change programmes drives new legislation and regulation into day-to-day operational and business practices > regulatory horizon scanning; and Risk Management Report across the Group. > using oversight and assurance themed reviews to assess The Group is unburdened with legacy conduct risk issues compliance with rules, regulations and policies. such as PPI, investments or derivatives mis-selling, LIBOR Monitoring manipulation and distressed asset portfolios. A robust assurance and quality monitoring regime is in Measurement place to test the performance of customer critical activities. Risk assessments are regularly reviewed and include Customer metrics are proactively used when reviewing assessments of control and material regulatory rule breaches, business performance and feedback mechanisms have been complaints and whistleblowing. established to learn from any issues identified. The Risk function reports on conduct risk and compliance exposure. The report forms the basis of challenge to the
business at the monthly Operational Risk, Conduct Risk and Financial Statements Compliance Committee. Other Information 164 I Virgin Money Group Annual Report 2017
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Concentration risk Definition Mitigation Concentration risk is defined as the exposure of the Group Credit risk management includes portfolio controls on to credit concentrations in relation to retail and wholesale product lines and risk segments to reflect risk appetite and portfolios, products and counterparty levels. Concentration individual limit guidelines. Credit policy is aligned to the risk is the most significant component of financial risk and Group’s risk appetite, restricts exposure to higher risk sectors therefore has been disclosed in detail. and segments and manages overall portfolio concentrations. Risk appetite Monitoring The Group has limited appetite for concentrated exposures by Monthly reporting on concentration risk exposures is country, region, loan size and type. made to the Board. Exposures Secured credit The principal source of concentration risk is from loans and The Group’s large exposures are reported in accordance with advances to customers in relation to: regulatory reporting requirements. Since the end of 2013 > geography (see page 165); London and the South East have experienced higher levels of house price growth than the rest of the UK. Whilst demand > loan size (see page 166); and for London property may be influenced by the international > loan type (see page 168). market, concerns over an asset bubble forming in these two regions are based on the rate of growth relative to other In addition, concentration risk arises from cash, debt regions, a potential divergence in supply and demand for securities and derivatives in relation to individual property, and customer affordability being stretched. The counterparty and country of exposure. Group’s policy restricts LTV for higher value loans, resulting in The Group has no significant concentrations of risk in the the lower average new lending LTVs observed in London (59%) credit card portfolio. and the South East (65%) compared to other regions (72%). Measurement The Group made changes to its lending policy in March 2016 Credit concentration risk is measured through the application in response to this risk through an income multiple cap. of limits relating to each concentration category. Virgin Money Group Annual Report 2017 I 165 Strategic Report Financial Results
The table below shows the geographical concentration of the mortgage portfolio.
2017 2016 (audited) £m % £m % East Anglia 862.4 2.6 726.0 2.6 East Midlands 1,784.3 5.3 1,556.4 5.2 North 1,118.2 3.3 1,025.3 3.4 Yorkshire & Humberside 1,881.5 5.6 1,640.3 5.5 North West 2,512.2 7.5 2,209.3 7.4
West Midlands 1,785.5 5.3 1,560.9 5.2 Governance South West 2,676.6 7.9 2,320.6 7.8 South East 8,447.1 25.1 7,365.7 24.8 Greater London 9,297.2 27.6 8,365.9 28.1 Wales 753.7 2.2 673.9 2.3 Scotland 2,030.3 6.0 1,828.0 6.1 Northern Ireland 534.0 1.6 478.3 1.6
Other 1.5 – 0.8 – Risk Management Report Total 33,684.5 100.0 29,751.4 100.0
2017 2016
˜ Greater London (28%) ˜ Greater London (28%) ˜ South East (25%) ˜ South East (25%) ˜ Scotland (6%) ˜ Scotland (6%) ˜ South West (8%) ˜ South West (8%) ˜ Other Regions (33%) ˜ Other Regions (33%) Financial Statements
The geographical split of the portfolio remains broadly unchanged. Other Information 166 I Virgin Money Group Annual Report 2017
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The table below shows retail secured credit concentrations by loan size.
2017 2016 (audited) £m % £m % 0-£100k 5,324.4 15.9 5,169.9 17.4 £100k-£250k 16,023.6 47.6 13,989.5 47.1 £250k-£500k 9,569.0 28.4 7,835.2 26.3 £500k-£1m 2,542.0 7.5 2,536.2 8.5 £1m-£2.5m 215.5 0.6 207.4 0.7 >£2.5m 10.0 – 13.2 – Total 33,684.5 100.0 29,751.4 100.0
As at 31 December 2017, 0.7% (2016: 0.7%) of mortgage balances consisted of loans in excess of £1 million.
2017 2016
˜ 0 – £100k (16%) ˜ 0 – £100k (17%) ˜ £100k – £250k (47%) ˜ £100k – £250k (47%) ˜ £250k – £500k (28%) ˜ £250k – £500k (26%) ˜ £500k – £1m (8%) ˜ £500k – £1m (9%) ˜ £1m – £2.5m (1%) ˜ £1m – £2.5m (1%) ˜ >£2.5m (0%) ˜ >£2.5m (0%)
The value of loans with balances of up to £250,000 increased by £2,188.6 million during 2017. This represents 56% of the total secured loans portfolio growth of £3,933.1 million. Virgin Money Group Annual Report 2017 I 167 Strategic Report Financial Results
The tables below show retail secured credit average LTV by loan size.
Residential Residential buy-to-let mortgage mortgage loans loans Total 2017 (audited) % % % 0-£100k 42.1 56.1 47.5 £100k-£250k 58.9 54.9 58.1 £250k-£500k 59.1 50.3 58.2 £500k-£1m 50.9 43.7 50.2 Governance £1m-£2.5m 43.1 38.7 42.3 >£2.5m 34.0 – 34.0 Total 56.1 54.1 55.8
Residential Residential buy-to-let mortgage mortgage loans loans Total 2016 (audited) % % % Risk Management Report 0-£100k 42.6 58.2 48.4 £100k-£250k 58.9 55.2 58.2 £250k-£500k 57.9 49.0 57.1 £500k-£1m 51.0 42.7 50.3 £1m-£2.5m 43.7 34.9 42.2 >£2.5m 35.8 – 35.8 Total 55.6 54.8 55.4
The Group’s policy restricts LTV for higher value loans. The average LTV for each loan band demonstrates that, excluding loans
under £100,000, higher value loans have lower LTVs, primarily due to seasoning of the portfolio and tightened underwriting Financial Statements practices. The average indexed LTV across the loan size bands has reduced in the majority of bands reflecting positive house price index movements throughout 2017. Other Information 168 I Virgin Money Group Annual Report 2017
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Loan type The residential mortgage loan portfolio comprises three > interest only loans allow borrowers to pay only the interest on principal loan repayment types: the loan each month, with the capital to be repaid in full at the > capital repayment loans amortise monthly through customer end of the loan period from an acceptable repayment vehicle. repayments which comprise an interest payment and For residential mortgage customers, the Group continues to contribution to the principal loan balance; apply strict affordability criteria and restricts applicant LTV. > part-and-part loans provide customers with the flexibility to For buy-to-let customers, interest only mortgages continue choose to pay a proportion of the loan on a capital repayment to be the predominant repayment method, with the majority basis and a proportion on interest only, with the interest only of customers looking to the sale of the mortgaged property element repaid from an acceptable repayment vehicle; and as the ultimate loan repayment vehicle. These loans are also subject to stringent lending standards. The tables below show retail secured credit concentrations by loan type.
Residential buy-to-let Residential mortgage loans mortgage loans Total 2017 (audited) £m % £m % £m % Capital repayment 22,963.2 84.0 1,040.0 16.4 24,003.2 71.3 Part-and-part 1,007.1 3.7 46.8 0.7 1,053.9 3.1 Interest only 3,346.9 12.3 5,280.5 82.9 8,627.4 25.6 Total 27,317.2 100.0 6,367.3 100.0 33,684.5 100.0
Residential buy-to-let Residential mortgage loans mortgage loans Total 2016 (audited) £m % £m % £m % Capital repayment 19,521.7 80.4 913.0 16.7 20,434.7 68.7 Part-and-part 1,115.6 4.6 37.3 0.7 1,152.9 3.9 Interest only 3,645.7 15.0 4,518.1 82.6 8,163.8 27.4 Total 24,283.0 100.0 5,468.4 100.0 29,751.4 100.0 Virgin Money Group Annual Report 2017 I 169 Strategic Report Financial Results
Wholesale Concentration risk is managed for both individual counterparties and for country of exposure. The Group does not set a limit on exposures to the Bank of England and the UK Sovereign. The table below shows wholesale credit risk exposures by country.
2017 2016 (audited) £m £m Australia 8.5 19.3 Canada 170.3 169.0 France 83.1 105.3 Governance UK 3,532.8 1,747.5 Netherlands – 102.7 USA 37.4 104.6 Supranational 234.1 129.3 Total 4,066.2 2,377.7
The Group’s wholesale credit risk exposure outside the UK remains well-diversified. UK exposures have increased by £1,785.3 million during the year due to further drawings from the TFS. Risk Management Report Financial Statements Other Information 170 I Virgin Money Group Annual Report 2017
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Funding and liquidity risk Definition The measurement framework has two other Funding risk is defined as the inability to raise and maintain important components: sufficient cost-effective funding in quality and quantity to > the volume and quality of the Group’s liquid asset portfolio is support the delivery of the business plan. Sound funding risk defined through a series of stress tests across a range of time management reduces the likelihood of liquidity risks occurring horizons and stress conditions. The Group ensures a liquidity through minimising refinancing concentration. surplus is held during normal market conditions above Liquidity risk is defined as the inability to accommodate liquidity stress outflow requirements. Stress cash outflow liability maturities and withdrawals, fund asset growth and assumptions have been established for individual liquidity risk otherwise meet contractual obligations to make payments as drivers across idiosyncratic and market wide stresses. they fall due. Internal and regulatory liquidity requirements are quantified Risk appetite on a daily basis, with holdings assessed against a full suite of The Group funds before it lends, and has a clear framework liquidity stresses weekly. for balance sheet structure in order to control funding, As the Group is predominantly retail funded, the largest refinancing and liquidity risk. The Group operates an potential source of liquidity stress is the unexpected outflow investment strategy for wholesale investments which of retail customer deposits. prioritises liquidity and ensures that the Group holds a liquid asset buffer in excess of both regulatory and internally The key risk driver assumptions applied to the scenarios are: assessed requirements. Liquidity risk driver Modelling assumption Exposures Retail funding Severe unexpected withdrawal of retail Liquidity exposure represents the amount of potential deposits by customers arising from stressed outflows in any future period less expected inflows. redemption or refinancing risk. No additional deposit inflows are assumed. The Group’s primary liquidity risk exposure arises through the Wholesale funding Limited opportunity to refinance wholesale redemption of retail deposits where customers are permitted contractual maturities. Full outflow of to withdraw funds with limited or no notice. Additional secured and unsecured funding during the exposures exist in relation to pipeline mortgage business, refinancing period, with no reinvestment undrawn card balances and wholesale funding. of funding. The Group is exposed to refinancing risk at the point of Off-balance sheet Cash outflows during the period of stress as a result of off-balance sheet commitments contractual maturity. The risk arises from both wholesale and such as mortgage pipeline, undrawn credit retail funding sources. card facilities and collateral commitments. Measurement Franchise viability Lending outflows, over and above A series of measures are used across the Group to monitor contractual obligations, are honoured as the both short and long-term liquidity requirements including Group preserves ongoing franchise viability. ratios, cash outflow triggers, wholesale and retail funding Liquid assets The liquidity portfolio value is reduced, maturity profile, early warning indicators and stress test reflecting stressed market conditions. survival periods. Liquidity risk appetite covers a range of metrics considered key to maintaining a strong liquidity and funding position. Strict criteria and limits are in place to ensure highly liquid marketable securities are available as part of the portfolio of liquid assets. Virgin Money Group Annual Report 2017 I 171 Strategic Report Financial Results
The scenarios and the assumptions are reviewed to ensure Monitoring that they continue to be relevant to the nature of the Liquidity is actively monitored by the Group. Reporting is business. The Group’s liquidity risk appetite is calibrated conducted through the Asset and Liability Committee and against a number of stressed metrics. The funding plan the Board Risk Committee. In a stress situation the level of is also stressed against a range of macro-economic monitoring and reporting is increased commensurate with scenarios; and the nature of the stress event. > the Group maintains a Liquidity Contingency Plan which is Daily monitoring and control processes are in place to designed to provide an early warning indicator for liquidity address internal and regulatory liquidity requirements. The concerns and a list of potential actions to address a liquidity Group monitors a range of market and internal early warning shortfall. As a result, mitigating actions can be taken to avoid indicators on a daily basis for early signs of liquidity risk in
a more serious situation developing. the market or specific to the Group. These are a mixture Governance Mitigation of quantitative and qualitative measures including daily The most material component of the Group’s funding and variation of customer balances, cash outflows, changes in liquidity position is the customer deposit base, which is primary liquidity portfolio, credit default swap spreads and supplemented by wholesale funding providing a source of changing funding costs. stable funding for balance sheet growth. Where funding Funding and liquidity management in 2017 concentrations exist, for example refinancing at maturity, During 2017, the Group maintained a strong funding and these are managed within the appropriate internal risk liquidity position in excess of risk appetite and the short- appetite, to control the size of the exposure. Refinancing term liquidity stress metric, the Liquidity Coverage Ratio Risk Management Report is planned in advance of maturity with liquidity held to (LCR). The Group’s LCR as at 31 December 2017 was 203.1%, mitigate the potential exposure. Longer term funding is representing a material surplus above the UK regulatory used to manage the Group’s strategic liquidity profile in minimum requirement of 90%. The LCR improved from line with limits. 153.7% at 31 December 2016 due to strong deposit raising The Group operates a Funds Transfer Pricing (FTP) mechanism activity throughout the year, net TFS drawings made during which supports customer pricing and the overall Group the year, and an RMBS issuance in September 2017, increasing balance sheet strategy. High Quality Liquid Assets (HQLA). The Group monitors the NSFR based on its own interpretations of current guidance FTP makes use of behavioural maturity profiles, taking available for CRD IV NSFR reporting. account of expected customer loan prepayments and the stability of customer deposits. Such behavioural maturity Wholesale funding is used to support balance sheet growth, assumptions are subject to formal governance and lengthen the contractual tenor of funding and diversify Financial Statements reviewed periodically. sources of funding. The Group has made use of the TFS during the year, taking overall drawings to £4.2 billion. The ability to deploy assets quickly, either through the repo market or through outright sale, is also an important source of liquidity for the Group. In addition to central bank reserves, the Group holds sizeable balances of high-quality marketable debt securities. Such securities can be sold to provide, or used to secure, additional cash inflows from market counterparties or central bank facilities (Bank of England), should the need arise. Other Information 172 I Virgin Money Group Annual Report 2017
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Funding sources plan following repricing activities and the retail product mix The Group is funded predominantly through retail customer moved towards fixed rate products, with overall contractual deposits. During 2017, the Group maintained a strong tenor increasing. presence in the retail savings market. Total customer deposits The Group’s loan-to-deposit ratio increased to 119.1% as increased by £2.7 billion in the year and represented 75.6% planned during 2017 from 114.5% at 31 December 2016. of the Group’s funding at 31 December 2017. The Group’s retail funding portfolio demonstrated resilience and stability The table below shows the Group’s funding position. throughout 2017. The retention performance was in line with
2017 2016 (audited) £m £m Loans and advances to customers 36,740.2 32,367.1 Loans and advances to banks 359.4 635.6 Debt securities classified as loans and receivables 0.3 0.7 Available-for-sale financial assets (encumbered) 149.4 10.6 Cash and balances at central banks (encumbered) 215.7 168.1 Funded assets 37,465.0 33,182.1 Other assets 377.1 407.1 Total assets (excluding liquid assets) 37,842.1 33,589.2 On balance sheet primary liquidity assets Cash and balances at central banks – primary 2,363.3 618.2 Available-for-sale financial assets (unencumbered) 902.4 848.2 Total assets 41,107.8 35,055.6 Less: Other liabilities (371.6) (560.8) Funding requirement 40,736.2 34,494.8 Funded by Customer deposits 30,808.4 28,106.3 Wholesale funding 8,102.9 4,718.0 Total equity 1,824.9 1,670.5 Total funding 40,736.2 34,494.8 Virgin Money Group Annual Report 2017 I 173 Strategic Report Financial Results
The table below shows the sources of wholesale funding.
2017 2016 (audited) £m £m Debt securities in issue 2,736.9 2,600.0 Liabilities in respect of securities sold under 1,130.0 850.0 repurchase agreements Secured loans 4,236.0 1,268.0 Total on-balance sheet sources of funds 8,102.9 4,718.0 Treasury bills raised through FLS 2,033.5 2,683.7 Total 10,136.4 7,401.7 Governance
Secured loans relate to the Group’s drawings from the Bank of England’s TFS. The increase is due to further TFS drawings that were made during the year. The tables below show residual maturity of the wholesale funding book.
Within 3 months 3-12 months 1-5 years After 5 years Total 2017 (audited) £m £m £m £m £m
Debt securities in issue – – 302.8 2,434.1 2,736.9 Risk Management Report Liabilities in respect of securities sold under 5.0 850.0 275.0 – 1,130.0 repurchase agreements Secured loans – – 4,236.0 – 4,236.0 Total on-balance sheet sources of funds 5.0 850.0 4,813.8 2,434.1 8,102.9 Treasury bills raised through FLS – 1,098.5 935.0 – 2,033.5 Total 5.0 1,948.5 5,748.8 2,434.1 10,136.4
Within 3 months 3-12 months 1-5 years After 5 years Total 2016 (audited) £m £m £m £m £m Financial Statements Debt securities in issue – – 305.8 2,294.2 2,600.0 Liabilities in respect of securities sold under repurchase 500.0 75.0 275.0 – 850.0 agreements Secured loans – – 1,268.0 – 1,268.0 Total on-balance sheet sources of funds 500.0 75.0 1,848.8 2,294.2 4,718.0 Treasury bills raised through FLS – 649.2 2,034.5 – 2,683.7 Total 500.0 724.2 3,883.3 2,294.2 7,401.7
An increase in average tenor of wholesale funding during 2017 is driven by the drawings of TFS, which are categorised as 1-5 years maturity. Other Information 174 I Virgin Money Group Annual Report 2017
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Encumbered assets The Group’s assets can be used to support funding collateral requirements for central bank operations or third party re-purchase transactions. Assets that have been set aside for such purposes are classified as ‘encumbered and pledged assets’ and cannot be used for other purposes. The tables below show the total asset encumbrance position of the Group for 2017 and 2016.
Encumbered assets Unencumbered assets Pledged as Available as collateral1 Other2 collateral3 Other4 Total 2017 (audited) £m £m £m £m £m Cash and balances at central banks – 215.7 – 2,363.3 2,579.0 Debt securities classified as loans and receivables – – 0.3 – 0.3 Available-for-sale financial assets – 149.4 899.3 3.1 1,051.8 Derivative financial assets – – – 78.8 78.8 Loans and advances to banks 93.0 201.1 – 65.3 359.4 Loans and advances to customers 13,109.4 – 4,670.3 18,960.5 36,740.2 Other assets 8.5 – – 289.8 298.3 Total assets 13,210.9 566.2 5,569.9 21,760.8 41,107.8 Treasury bills raised through FLS held off balance sheet5 182.9 – 1,850.6 – 2,033.5 Total assets plus off-balance sheet Treasury bills raised 13,393.8 566.2 7,420.5 21,760.8 43,141.3 through FLS Virgin Money Group Annual Report 2017 I 175 Strategic Report Financial Results
Encumbered assets Unencumbered assets Pledged as Available as collateral1 Other2 collateral3 Other4 Total 2016 (audited) £m £m £m £m £m Cash and balances at central banks – 168.1 – 618.2 786.3 Debt securities classified as loans and receivables – – 0.7 – 0.7 Available-for-sale financial assets 10.6 – 840.3 7.9 858.8 Derivative financial assets – – – 104.2 104.2 Loans and advances to banks 181.1 354.4 – 100.1 635.6
Loans and advances to customers 9,425.6 – 2,932.9 20,008.6 32,367.1 Governance Other assets 53.9 – – 249.0 302.9 Total assets 9,671.2 522.5 3,773.9 21,088.0 35,055.6 Treasury bills raised through FLS held off balance sheet5 – – 2,683.7 – 2,683.7 Total assets plus off-balance sheet Treasury bills raised 9,671.2 522.5 6,457.6 21,088.0 37,739.3 through FLS
1 Encumbered assets pledged as collateral include amounts to derivative counterparties of £93.0 million (2016: £181.1 million) and amounts in respect of centrally cleared derivatives of £8.5 million (2016: £53.9 million). Encumbered loans and advances to customers of £13,109.4 million (2016: £9,425.6 million) consist of securitised mortgages and other loan pools
positioned with the Bank of England that have been pledged as collateral for funding and liquidity transactions. As at 31 December 2017, £6,219.8 million (2016: £2,302.3 million) of loan Risk Management Report pools have been pledged as collateral in respect of secured loans and repo agreements. 2 Other encumbered assets are assets that cannot be used for secured funding due to legal or other reasons. These comprise the mandatory reserve and the minimum requirement for the BACS payment system of £215.7 million (2016: £168.1 million) and cash reserves supporting secured funding structures of £201.1 million (2016: £354.4 million). 3 Unencumbered asserts which are classified as ‘Available for collateral’ are readily available to secure funding or to meet collateral requirements. Loans and advances to customers are classified as ‘Available for collateral’ only if they are already in such a form that they can be used immediately to raise funding. 4 Other unencumbered assets are assets which are not subject to any restrictions but are not readily available for use. 5 These amounts represent Treasury Bills received by the Group through FLS, which are not recognised on the balance sheet. The Group is permitted to re-pledge these securities to generate on-balance sheet financial assets, such as cash, or to fund lending. These items are classified as encumbered where the Group has used them in repurchase transactions or unencumbered where it has not. The Group’s total level of asset encumbrance increased by £3.8 billion to 32.4% at 31 December 2017. This was primarily due to using the TFS to support increased lending, which took total drawings to date to £4.2 billion. The Group manages the volume of available unencumbered collateral to meet requirements arising from current and future secured funding transactions. Financial Statements Other Information 176 I Virgin Money Group Annual Report 2017
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Liquid asset portfolio The Group maintains a portfolio of liquid assets, predominantly in high-quality unencumbered securities issued by the UK Government or supranational institutions and deposits with the Bank of England. The portfolio mix is aligned to the liquidity coverage requirement defined in European liquidity regulatory standards. Other liquidity resources represent additional unencumbered liquid assets held over and above high-quality liquid assets. These are intended to cover more extreme stress events and provide flexibility for liquidity management. The table below shows the composition of the liquidity portfolio.
2017 2016 2017 Average 2016 Average Level 1 £m £m £m £m Cash and balances at central banks 2,525.9 1,923.0 737.2 819.6 UK Government securities 207.3 221.8 306.7 339.3 Other HQLA level 1 eligible – – – 33.8 Supranational securities 234.1 178.0 129.3 222.0 Treasury bills raised through FLS 1,850.6 2,219.7 2,683.7 2,528.2 Covered bonds (Level 1 eligible) 374.7 378.8 304.9 434.4 Total level 1 5,192.6 4,921.3 4,161.8 4,377.3 Level 2a Covered bonds (Level 2a eligible) 21.7 22.2 22.2 22.4 Total level 2a 21.7 22.2 22.2 22.4 Level 2b Eligible RMBS 50.1 52.6 38.6 49.1 Total level 2b 50.1 52.6 38.6 49.1
High quality liquid assets (Level 1 + 2a + 2b) 5,264.4 4,996.1 4,222.6 4,448.8 Other liquidity resources Covered bonds – – – 1.2 Non-eligible RMBS 11.4 8.6 13.6 11.6 Certificates of deposit – 40.8 – 44.5 Floating rate notes – 6.3 25.0 9.6 Money market loans 13.8 13.3 26.0 38.8 Total other liquidity resources 25.2 69.0 64.6 105.7 Self-issued RMBS 601.7 958.2 1,306.4 550.8 Total liquidity 5,891.3 6,023.3 5,593.6 5,105.3 The Group holds sufficient liquidity to meet all internal and regulatory liquidity requirements. Virgin Money Group Annual Report 2017 I 177 Strategic Report Financial Results
The following tables analyse assets and liabilities of the Group into relevant maturity groupings based on the remaining contractual period at the balance sheet date. The Group’s assets and liabilities may be repaid or otherwise mature earlier or later than implied by their contractual terms. In particular, the majority of customer deposits are contractually payable on demand or at short notice. In practice, these deposits are not usually withdrawn on their contractual maturity. Amounts in respect of RMBS in issue have a maximum contractual maturity consistent with underlying mortgage assets (in excess of five years); the cash flow profile below reflects that securitisation documents will require repayment of the securities in line with repayments of the underlying mortgages, which may be in advance of the legal maturity date.
Within 3 2017 (audited) months 3-12 months 1-5 years After 5 years Total Assets £m £m £m £m £m Governance Cash and balances at central banks 2,526.0 – – 53.0 2,579.0 Derivative financial instruments 0.5 1.4 76.8 0.1 78.8 Loans and receivables: Loans and advances to banks 359.4 – – – 359.4 Loans and advances to customers 3,328.0 794.2 4,429.1 28,188.9 36,740.2 Debt securities – – – 0.3 0.3
Available-for-sale financial assets 159.4 18.9 314.9 558.6 1,051.8 Risk Management Report Other assets 75.7 7.3 60.3 155.0 298.3 Total assets 6,449.0 821.8 4,881.1 28,955.9 41,107.8 Liabilities Deposits from banks 18.0 850.0 4,511.0 – 5,379.0 Customer deposits 27,268.6 2,144.2 1,395.0 0.6 30,808.4 Derivative financial instruments 9.4 4.4 64.3 15.4 93.5 Debt securities in issue – – 302.8 2,434.1 2,736.9 Other liabilities 185.8 70.2 5.7 3.4 265.1 Total liabilities 27,481.8 3,068.8 6,278.8 2,453.5 39,282.9 Financial Statements Net liquidity (gap) / surplus (21,032.8) (2,247.0) (1,397.7) 26,502.4 1,824.9 Other Information 178 I Virgin Money Group Annual Report 2017
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Within 3 2016 (audited) months 3-12 months 1-5 years After 5 years Total Assets £m £m £m £m £m Cash and balances at central banks 737.2 – – 49.1 786.3 Derivative financial instruments 1.4 1.5 99.8 1.5 104.2 Loans and receivables: Loans and advances to banks 635.6 – – – 635.6 Loans and advances to customers 2,700.3 720.1 3,910.6 25,036.1 32,367.1 Debt securities – – – 0.7 0.7 Available-for-sale financial assets – 25.0 283.2 550.6 858.8 Other assets 99.2 25.3 10.8 167.6 302.9 Total assets 4,173.7 771.9 4,304.4 25,805.6 35,055.6 Liabilities Deposits from banks 514.5 75.0 1,543.0 – 2,132.5 Customer deposits 24,540.2 1,883.6 1,682.5 – 28,106.3 Derivative financial instruments 8.2 8.6 185.6 27.3 229.7 Debt securities in issue – – 305.8 2,294.2 2,600.0 Other liabilities 240.7 67.0 5.0 3.9 316.6 Total liabilities 25,303.6 2,034.2 3,721.9 2,325.4 33,385.1 Net liquidity (gap) / surplus (21,129.9) (1,262.3) 582.5 23,480.2 1,670.5 Virgin Money Group Annual Report 2017 I 179 Strategic Report Financial Results
Cash flow profile The tables below allocate the Group’s non-derivative cash outflows into relevant maturity groupings based on the remaining period between the balance sheet date and the contractual maturity date. The amounts disclosed are the contractual undiscounted cash flows. These differ from balance sheet values due to the effects of discounting on certain balance sheet items and due to the inclusion of contractual future interest flows.
Within 3 months 3-6 months 6-12 months 1-5 years Over 5 years Total 2017 (audited) £m £m £m £m £m £m Deposits from banks 23.2 858.9 12.4 4,567.9 – 5,462.4 Customer deposits 27,338.1 847.3 1,495.7 1,571.6 0.6 31,253.3 Governance Debt securities in issue 169.4 169.7 335.4 2,102.3 – 2,776.8 Total 27,530.7 1,875.9 1,843.5 8,241.8 0.6 39,492.5
Within 3 months 3-6 months 6-12 months 1-5 years Over 5 years Total 2016 (audited) £m £m £m £m £m £m Deposits from banks 514.1 76.7 3.1 1,556.8 – 2,150.7 Customer deposits 24,628.0 680.8 1,371.3 1,835.9 – 28,516.0 Risk Management Report Debt securities in issue 158.7 161.2 297.3 2,056.5 – 2,673.7 Total 25,300.8 918.7 1,671.7 5,449.2 – 33,340.4 Financial Statements Other Information 180 I Virgin Money Group Annual Report 2017
Risk Management Report
Full analysis of risk classes
The following tables display future derivative cash flows in the relevant maturity groupings in which they fall due. Cash flows for the floating legs of derivative transactions are calculated using the forward interest rate curve. These cash flows are not discounted in the same way that derivative valuations are, and totals will therefore not be identical to those reported on derivatives in the notes to the financial statements.
Within 3 months 3-6 months 6-12 months 1-5 years Over 5 years Total 2017 (audited) £m £m £m £m £m £m Settled on a net basis Derivatives in economic and not accounting hedges (1.5) (0.1) (1.5) (4.4) – (7.5) Derivatives in accounting hedge relationships (12.9) (8.1) (14.1) (32.3) (7.6) (75.0) (14.4) (8.2) (15.6) (36.7) (7.6) (82.5) Settled on a gross basis Outflows 30.0 28.9 54.7 224.9 – 338.5 Inflows (29.4) (28.4) (53.9) (230.0) – (341.7) Total (13.8) (7.7) (14.8) (41.8) (7.6) (85.7)
Within 3 months 3-6 months 6-12 months 1-5 years Over 5 years Total 2016 (audited) £m £m £m £m £m £m Settled on a net basis Derivatives in economic and not accounting (1.8) (0.5) (4.5) (12.2) (0.3) (19.3) hedges Derivatives in accounting hedge relationships (26.1) (21.2) (37.6) (110.0) (6.2) (201.1) (27.9) (21.7) (42.1) (122.2) (6.5) (220.4) Settled on a gross basis Outflows 1.4 2.6 2.5 23.3 – 29.8 Inflows (1.5) (3.0) (2.8) (26.6) – (33.9) Total (28.0) (22.1) (42.4) (125.5) (6.5) (224.5) Virgin Money Group Annual Report 2017 I 181 Strategic Report Financial Results
External credit ratings Virgin Money Holdings (UK) plc does not have an external credit rating. Disclosures below relate to its subsidiary, Virgin Money plc. Virgin Money plc’s short and long-term credit ratings as at 31 December 2017 are as follows.
Long term Short term Outlook Date of last rating action Rating action type Fitch BBB+ F2 Stable 7 September 2017 Affirmed Moody’s Baa2 P2 Stable 26 June 2017 Assigned
In September 2017, the rating agency Fitch maintained Virgin Money plc’s outlook as Stable and affirmed its long-term rating at BBB+. On 26 June 2017, the rating agency Moody’s assigned Virgin Money plc’s outlook as Stable and its long-term rating as Baa2. Governance The table below sets out the amount of additional collateral the Company would need to provide in the event of a one and two notch downgrade by external credit ratings agencies.
Cumulative adjustment for a one-notch downgrade Cumulative adjustment for a two-notch downgrade £m £m 2017 – – 2016 – 10.0
In addition, the Group could be required to post further collateral for payment systems, clearing houses and to support secured Risk Management Report funding transactions. These requirements can be directly linked to the Group’s external credit rating or driven by other factors. The Group monitors the related collateral requirements and includes these in liquidity stress requirements. Financial Statements Other Information 182 I Virgin Money Group Annual Report 2017
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Full analysis of risk classes
Capital Definition The PRA supplements the Group’s minimum total capital Capital risk is defined as the risk that the Group has a requirement by setting additional Pillar 2 requirements issued sub-optimal amount or quality of capital or that capital is within the Group’s Individual Capital Guidance (ICG). The inefficiently deployed across the Group. PRA provided the Group’s revised ICG in 2016 which included Risk appetite a Pillar 2A component of 3.87% of risk-weighted assets. The Group maintains a high-quality capital base, targeting The Group’s ICG is the higher of Pillar 1 and 2A combined capital ratios which support business development and the or the Basel I floor. The Basel I floor is a transitional capital risks inherent in the strategic plan. minimum requirement based on the Basel I framework. As at 31 December 2017, as per the Group’s ICG, the Basel I floor The Group’s capital planning approach is focused on was the Group’s binding constraint and was equivalent to a maintaining capital in excess of regulatory requirements Pillar 2A capital add-on of 5.71%. at all times. As part of the capital planning process, capital positions Measurement are subjected to stress testing and sensitivity analysis The Group calculates capital resources and requirements to determine the adequacy of capital resources against using the CRD IV CRR regulatory framework as implemented minimum requirements, including ICG, over the forecast by the PRA. Pillar 1 capital requirements are calculated period. This stress testing generates an additional capital in respect of credit risk, operational risk, market risk and requirement issued by the PRA, known as the PRA buffer, credit valuation adjustments. The capital requirement which is a matter between the PRA and the Group. The PRA for residential mortgages is measured using an Advanced buffer also takes account of the capital conservation buffer. Internal Ratings Based (AIRB) approach approved by the PRA, and all other requirements are calculated using the From 1 January 2018, the Group will transition to the new Standardised Approach. accounting requirements of IFRS 9. The Group uses AIRB models in measuring the credit risk of secured loans and advances to customers as described on page 134. In contrast, impairment allowances are recognised for financial reporting purposes only for loss events that have occurred at the balance sheet date, based on objective evidence of impairment. Due to the different methodologies applied, the amount of incurred credit loss provisions in the financial statements differs from the amount determined from expected loss models used for internal operational management, capital requirement and other banking regulation purposes. Pages 209 to 210 provide details of the Group’s approach to the impairment of financial assets. Virgin Money Group Annual Report 2017 I 183 Strategic Report Financial Results
Mitigation 27 June 2018. In November 2017, the Bank of England The Group has capital management procedures that are announced a further increase to 1.0%, with binding effect designed to ensure compliance with risk appetite and from 28 November 2018. The Group expects to be able regulatory requirements and are positioned to meet to accommodate these stepped increases as and when anticipated future changes to capital requirements. implemented within existing management buffers. The Group is able to accumulate additional capital through CRD IV also introduced a new leverage ratio measure. The profit retention, by raising equity through, for example, a leverage ratio is a non-risk based measure that is designed rights issue or debt exchange and by raising Tier 1 and Tier to act as a supplement to risk based capital requirements. It 2 capital by issuing subordinated liabilities. The cost and is intended as a back stop measure. The leverage calculation availability of additional capital is dependent upon market determines a ratio based on the relationship between conditions and perceptions at the time. The Group is also total Tier 1 capital and total consolidated exposures (total Governance able to manage the demand for capital through management exposure is the sum of on-balance sheet exposures, derivative actions including adjusting lending strategy, risk hedging exposures, securities financing transaction exposures and strategies and through business disposals. If necessary, this off-balance sheet items). The Group is not subject to the PRA could include limiting business growth. Leverage Framework until core deposits exceed £50 billion. Monitoring To avoid capital cliffs the Group maintains a prudent risk Capital is actively managed with regulatory ratios being a key appetite for leverage. factor in the Group’s planning processes and stress analysis. The leverage ratio for the Group (based on the Basel III A minimum of a three year forecast of the Group’s capital definition of January 2014, and the revised CRD IV definition of Risk Management Report position, based upon the strategic plan, is produced at least October 2014) is 3.9% as at 31 December 2017 (2016: 4.4%). annually to inform the capital strategy. Shorter term forecasts The Financial Services (Banking Reform) Act 2013 introduces a are more frequently undertaken to understand and respond to ring-fence for UK retail banks, with the aim of separating core variations of the Group’s actual performance against the plan. banking services critical to individuals and small and medium- Regular reporting of actual and projected ratios is undertaken, sized enterprises from wholesale and investment banking including submissions to the Asset and Liability Committee, services. The Group anticipates being a fully ring-fenced the Risk Management Committee and the Board. bank by 1 January 2019 implementation date and is preparing Capital developments for this change. CRD IV introduced new capital limits and buffers for banks, Minimum Requirements for Own Funds and Eligible Liabilities and includes a requirement to hold Common Equity Tier 1 (MREL) were applicable from 1 January 2016 on a transitional capital to account for capital conservation, countercyclical basis with full implementation required by 1 January 2022. Financial Statements and systemic risk buffers. These new buffers will influence the The Bank of England provided the Group’s MREL guidance and type of capital instruments that best meet the requirements transitional arrangements during 2016. likely to be expected of the Group. From 1 January 2020 until 31 December 2021 the Group will A capital conservation buffer of 2.5% was introduced be required to hold 18% of risk-weighted assets. The Group on 1 January 2016. This is being introduced through a is working towards implementation of these requirements transitionary period of four years with the buffer increasing and has reflected requirements in strategic plans. The Group by 0.625% per annum from 1 January 2016. The Bank expect to issue further senior debt over the next four year of England announced in June that they would increase period to ensure compliance with MREL obligations. the countercyclical capital buffer from 0% to 0.5% from Other Information 184 I Virgin Money Group Annual Report 2017
Risk Management Report
Full analysis of risk classes
The table below shows the Group’s capital resources.
2017 2016 £m £m Share capital and share premium account 654.6 654.6 Other equity instruments 384.1 384.1 Other reserves (18.1) (27.4) Retained earnings 804.3 659.2 Total equity per balance sheet (audited) 1,824.9 1,670.5 Regulatory capital adjustments Deconsolidation of non-regulated companies (0.3) 5.4 Foreseeable distribution on Additional Tier 1 securities (3.8) (4.9) Foreseeable distribution on ordinary shares (18.1) (15.5) Other equity instruments (384.1) (384.1) Cash flow hedge reserve 22.7 31.5 Additional valuation adjustment (1.2) (1.2) Intangible assets (128.4) (80.6) Excess of expected loss over impairment (46.9) (41.1) Deferred tax on tax losses carried forward (0.6) (7.3) Total regulatory capital adjustments (560.7) (497.8) Common Equity Tier 1 capital 1,264.2 1,172.7 Additional Tier 1 securities 384.1 384.1 Total Tier 1 capital 1,648.3 1,556.8 Tier 2 capital General credit risk adjustments 14.3 11.9 Total Tier 2 capital 14.3 11.9
Total own funds 1,662.6 1,568.7
Common Equity Tier 1 ratio 13.8% 15.2% Tier 1 ratio 18.0% 20.2% Total capital ratio 18.1% 20.4%
As required by Article 26(2) of the Capital Requirements Regulation, a deduction has been made for foreseeable dividends on 2017 profits. Virgin Money Group Annual Report 2017 I 185 Strategic Report Financial Results
The table below shows movements in Common Equity Tier 1 capital.
2017 2016 £m £m At 1 January 1,172.7 1,070.0 Movement in retained earnings 145.1 114.4 Additional valuation adjustment 0.0 (1.2) Movement in available-for-sale reserve 0.5 4.4 Distributions on ordinary shares paid during the year 23.9 20.8 Distributions on ordinary shares accrued during the year (26.5) (22.6) Governance AT1 coupons accrued at previous year end 4.9 2.1 AT1 coupons accrued at this year end (3.8) (4.9) Movement in reserves of non-regulated companies (5.7) 0.9 Movement in intangible assets (47.8) (16.2) Movement in excess of expected loss over impairment (5.8) (5.7) Movement in deferred tax on tax losses carried forward 6.7 10.7 At 31 December 1,264.2 1,172.7 Risk Management Report The main drivers for the increase in capital resources are the increase in retained earnings and the reduction in deferred tax asset on tax losses, offset by increased intangible assets, and other items as set out in the table above. Financial Statements Other Information 186 I Virgin Money Group Annual Report 2017
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Full analysis of risk classes
The table below shows total risk-weighted assets.
2017 2016 £m £m Retail mortgages 5,790.5 4,764.5 Retail unsecured lending 2,282.9 1,847.4 Treasury 134.8 178.6 Other assets 204.3 226.4 Credit valuation adjustments 10.4 22.6 Operational risk 755.7 655.3 Total risk-weighted assets 9,178.6 7,694.8
The table below shows Pillar 1 risk-weighted assets and capital requirements by business line.
2017 2017 2016 2016 Risk- Pillar 1 Risk- Pillar 1 weighted Capital weighted Capital assets requirement assets requirement £m £m £m £m Mortgages and savings 6,308.1 504.6 5,204.5 416.4 Credit cards 2,467.6 197.4 2,012.3 161.0 Financial services 53.4 4.3 50.4 4.0 Central functions 349.5 28.0 427.6 34.2 Total 9,178.6 734.3 7,694.8 615.6 Virgin Money Group Annual Report 2017 I 187 Strategic Report Financial Results
Movement in risk-weighted assets The table below shows the movement in risk-weighted assets There was an additional increase in operational risk-weighted during the year to 31 December 2017. Lending growth in the assets of £100.4 million. This increase was in line with the year resulted in a 19.3% increase in total risk-weighted assets. standardised approach for the calculation of operational risk, For mortgages, growth in risk-weighted assets was higher where the growth in average income over the past three years than growth in customer balances as the average mortgage is recognised in a higher level of operational risk-weighted risk-weight density increased to 17.2% from 16.0% in 2016. asset. This was largely offset by a reduction in exposure to This was in line with the Group’s expectations as the advanced higher risk-weighted instruments and counterparties in the ratings models result in higher risk-weights for new lending Group’s liquid asset portfolio. than for maturing loans. For credit cards, growth in risk- weighted assets was in line with growth in customer balances Governance as unsecured risk-weighted assets are calculated on the standardised approach.
Other Credit IRB Standardised standardised valuation Operational mortgage lending assets adjustment risks Total £m £m £m £m £m £m RWAs at 1 January 2017 4,764.5 1,847.4 405.0 22.6 655.3 7,694.8 Book size 1,179.7 435.6 – – – 1,615.3 Risk Management Report Other movements (153.7) (0.1) (65.9) (12.2) 100.4 (131.5) RWAs at 31 December 2017 5,790.5 2,282.9 339.1 10.4 755.7 9,178.6
Leverage ratio CRD IV introduced a new balance sheet metric, the Off-balance sheet items are made up of undrawn credit leverage ratio, from 1 January 2014. The leverage ratio is facilities. Credit conversion factors have been applied to these risk insensitive, requiring capital to be held against total items to convert them to an on-balance sheet equivalent in on and off-balance sheet exposures including undrawn compliance with the CRD IV rules. credit facilities. Other regulatory adjustments consist of adjustments that The Basel Committee is testing this ratio at a minimum have been applied to Tier 1 capital which are also applied to threshold of 3.0% until 2017. The Group’s leverage ratio as the leverage ratio exposure measure. This ensures consistency at 31 December 2017 was 3.9% (December 2016: 4.4%) as between Tier 1 capital and the total exposures of the ratio. Financial Statements disclosed below. Exposure values associated with derivatives and securities financing transactions have been reported in compliance with CRD IV rules. For the purposes of the leverage ratio, the derivative measure has been adjusted for regulatory netting rules, potential future exposures and cash collateral. Other Information 188 I Virgin Money Group Annual Report 2017
Risk Management Report
Full analysis of risk classes
2017 2016 £m £m Total tier 1 capital for leverage ratio Common equity tier 1 capital 1,264.2 1,172.7 Additional tier 1 capital 384.1 384.1 Total tier 1 capital 1,648.3 1,556.8 Exposure measure Statutory balance sheet assets Derivative financial instruments 78.8 104.2 Loans and advances and other assets 41,029.0 34,951.4 Total assets 41,107.8 35,055.6 Deconsolidation adjustments Loans and advances and other assets (0.4) 5.3 Total deconsolidation adjustments (0.4) 5.3 Derivative adjustments Adjustments for regulatory netting (11.5) (25.4) Adjustments for cash collateral (142.5) (195.0) Net written credit protection 36.8 – Regulatory potential future exposure 131.3 86.8 Total derivative adjustments 14.1 (133.6) Securities financing transactions adjustments 364.3 222.4 Off-balance sheet items 776.8 714.5 Regulatory deductions and other adjustments (154.4) (98.7) Total exposures 42,108.2 35,765.5 Leverage ratio 3.9% 4.4% Virgin Money Group Annual Report 2017 I 189 Strategic Report Financial statements
191 Independent auditors’ report 200 Consolidated financial statements Financial Results 251 Parent company financial statements Governance Risk Management Report Financial Statements Other Information
Virgin Money Lounge, Manchester 190 I Virgin Money Group Annual Report 2017 Financial statements
Independent auditors’ report 191 Notes to the consolidated 207 18. Securitisation financial statements Consolidated income statement 200 19. Intangible assets 1. Basis of preparation and Consolidated statement of 201 20. Tangible fixed assets accounting policies comprehensive income 21. Deferred tax 2. Segmental analysis and Consolidated balance sheet 202 reconciliation to underlying 22. Other assets Consolidated statement of 204 basis 23. Deposits from banks changes in equity 3. Net interest income 24. Customer deposits Consolidated cash flow statement 206 4. Net fee and commission 25. Debt securities in issue income 26. Other liabilities 5. Other operating income 27. Share capital and share 6. Operating expenses premium 7. Share based payments 28. Other equity instruments 8. Allowance for impairment 29. Other reserves losses on loans and receivables 30. Retained earnings 9. Taxation 31. Contingent liabilities and 10. Earnings per share commitments 11. Dividends 32. Fair value of financial assets 12. Analysis of financial assets and financial liabilities and financial liabilities by 33. Offsetting of financial assets measurement basis and financial liabilities 13. Derivative financial 34. Cash flow statements instruments 35. Related party transactions 14. Loans and advances to banks 36. Events after balance 15. Loans and advances to sheet date customers 37. Future accounting 16. Available-for-sale financial developments assets 38. Country by country reporting 17. Collateral pledged and received
Parent Company balance sheet 251 Notes to the Parent Company 254 7. Retained earnings financial statements Parent Company statement of 252 8. Analysis of financial assets changes in equity 1. Basis of preparation and and financial liabilities by accounting policies measurement basis Parent Company cash flow statement 253 2. Investment in subsidiary 9. Fair value of financial assets undertakings and financial liabilities 3. Deferred tax 10. Cash flow statements 4. Other assets 11. Related party transactions 5. Other liabilities 6. Share capital, share premium and other equity instruments Virgin Money Group Annual Report 2017 I 191
Independent auditors’ report to the members of Strategic Report Virgin Money Holdings (UK) plc
Report on the audit of the financial statements
Opinion Basis for opinion
In our opinion, Virgin Money Holdings (UK) plc’s Group We conducted our audit in accordance with International Financial Results financial statements and Parent Company financial Standards on Auditing (UK) (ISAs (UK)) and applicable law. statements (the ‘financial statements’): Our responsibilities under ISAs (UK) are further described > give a true and fair view of the state of the Group’s and of the in the Auditors’ responsibilities for the audit of the financial Parent Company’s affairs as at 31 December 2017 and of the statements section of our report. We believe that the audit Group’s profit and the Group’s and the Parent Company’s cash evidence we have obtained is sufficient and appropriate to flows for the year then ended; provide a basis for our opinion. > have been properly prepared in accordance with IFRSs as Independence adopted by the European Union and, as regards the Parent We remained independent of the Group in accordance with Company’s financial statements, as applied in accordance with the ethical requirements that are relevant to our audit of the provisions of the Companies Act 2006; and the financial statements in the UK, which includes the FRC’s Ethical Standard, as applicable to listed public interest > have been prepared in accordance with the requirements of entities, and we have fulfilled our other ethical responsibilities Governance the Companies Act 2006 and, as regards the Group financial in accordance with these requirements. statements, Article 4 of the IAS Regulation. To the best of our knowledge and belief, we declare that non- We have audited the financial statements, included within audit services prohibited by the FRC’s Ethical Standard were the Annual Report and Accounts (the ‘Annual Report’), which not provided to the Group or the Parent Company. comprise: the Group and Parent Company balance sheets as at 31 December 2017; the Group income statement, the Other than those disclosed in note 6 to the financial Group statement of comprehensive income, the Group and statements, we have provided no non-audit services Parent Company statements of cash flows, and the Group and to the Group or the Parent Company in the period from Risk Management Report Parent Company statements of changes in equity for the year 1 January 2017 to 31 December 2017. then ended; and the notes to the financial statements, which include a description of the significant accounting policies. Our opinion is consistent with our reporting to the Audit Committee.
Our audit approach Overview > Overall Group materiality: £13.4 million (2016: £9.8 million), based on 5% of adjusted profit before tax, adjusted for £6.5 million of strategic items (as detailed in note 2), as
these are not considered to be recurring. This adjusted measure of profit is deemed as the Financial Statements most appropriate benchmark upon which to base our materiality. Materiality
> We performed a full scope audit over the Group’s five 100% owned subsidiaries and certain Special Purpose Vehicle (SPV) balances were scoped in on a line by line basis based on their proportion of the consolidated financial statement line item. 98% of interest income, 98% of profit before tax (98% of the adjusted profit before tax figure as used for Audit scope our overall materiality calculation) and 99% of total assets were subject to audit.
Key audit matters included: Key audit > Revenue recognition – Effective Interest Rate (EIR) accounting. Other Information matters > Impairment of loans and advances to customers. > Recognition of intangible assets. > Disclosure of impact of adoption of IFRS 9. 192 I Virgin Money Group Annual Report 2017
Independent auditors’ report to the members of Virgin Money Holdings (UK) plc
Report on the audit of the financial statements
The scope of our audit There are inherent limitations in the audit procedures As part of designing our audit, we determined materiality described above and the further removed non-compliance and assessed the risks of material misstatement in the with laws and regulations is from the events and transactions financial statements. In particular, we looked at where reflected in the financial statements, the less likely we would the Directors made subjective judgements, for example in become aware of it. respect of significant accounting estimates that involved We did not identify any key audit matters relating to making assumptions and considering future events that are irregularities, including fraud. As in all of our audits, we inherently uncertain. also addressed the risk of management override of internal We gained an understanding of the legal and regulatory controls, including testing journals and evaluating whether framework applicable to the Group and the industry in which there was evidence of bias by the Directors that represented a it operates, and considered the risk of acts by the Group which risk of material misstatement due to fraud. were contrary to applicable laws and regulations, including Key audit matters fraud. We designed audit procedures at group and significant Key audit matters are those matters that, in the auditors’ component level to respond to the risk, recognising that the professional judgement, were of most significance in the risk of not detecting a material misstatement due to fraud is audit of the financial statements of the current period and higher than the risk of not detecting one resulting from error, include the most significant assessed risks of material as fraud may involve deliberate concealment by, for example, misstatement (whether or not due to fraud) identified by the forgery or intentional misrepresentations, or through auditors, including those which had the greatest effect on: collusion. We focused on laws and regulations that could the overall audit strategy; the allocation of resources in the give rise to a material misstatement in the Group financial audit; and directing the efforts of the engagement team. statements, including but not limited to, the Companies Act These matters, and any comments we make on the results 2006, the Listing Rules, and UK tax legislation. of our procedures thereon, were addressed in the context Our tests included, but were not limited to, review of the of our audit of the financial statements as a whole, and in financial statement disclosures to underlying supporting forming our opinion thereon, and we do not provide a separate documentation, review of correspondence with and reports to opinion on these matters. This is not a complete list of all risks the regulators, review of correspondence with legal advisors, identified by our audit. enquiries of management, and review of internal audit reports Each of the key audit matters below related to our audit of in so far as they related to the financial statements. Group financial statements. Virgin Money Group Annual Report 2017 I 193
Independent auditors’ report to the members of Strategic Report Virgin Money Holdings (UK) plc
Key audit matter How our audit addressed the key audit matter
Revenue recognition – Effective Interest Rate (EIR) accounting Across both the secured and unsecured lending EIR calculation Financial Results See note 1 of the financial statements for the disclosure of the models, we tested controls over data input and checked the accuracy related accounting policies and critical estimates and judgements, of model calculations. We also assessed controls over the setting and and page 88 for the Audit Committee’s consideration of key financial approving of key assumptions. issues and judgements. We tested the impact of any changes in assumptions on the financial The Group’s total loans and advances to customers balance of £36.7 statements, ensuring these were calculated in accordance with billion and net interest income of £594.6 million include certain EIR IAS 39. adjustments as per the requirements of IAS 39. In relation to secured lending EIR, we: The vast majority of the income recognised by the Group is system > Substantively tested a sample of fees incorporated within the generated and requires minimal judgement, therefore we focused calculation to underlying secured lending agreements and our work in relation to revenue recognition on EIR accounting due considered the appropriateness of the inclusion of fees in the EIR to the inherent subjectivity and complexity involved in forecasting calculation; and future customer behaviour on which the EIR adjustment calculation is > Assessed the estimate of the expected life applied and forecast based. Changes in assumptions used in the forecasting model could cash flows during this life by comparing to recent Group experience Governance have a material impact on EIR adjustments and hence the revenue and expectations of future patterns. recognised in any one accounting period. We concluded that, whilst there is significant judgement inherent in The most significant assumption for secured lending EIR is the the secured EIR adjustment, the assumptions applied were within a estimation of the expected life of the product over which fees are reasonable range based on past experience and future assumptions. spread. In relation to unsecured lending EIR, we: For unsecured lending, significant judgement is applied in calculating
the EIR adjustment including setting assumptions relating to > Tested controls over the ongoing monitoring of actual credit
movements in customer balances over the expected life and the card cash flows as compared with the forecast assumptions and
related future revenue associated with these balances in the context compared 2017 experience with expected experience for that period on a sample basis; of the Group’s historic experience. Key assumptions include retail Risk Management Report spending levels and repayment rates. > Assessed the key forecast assumptions, including expected life, balance, repayment rate, volume of retail spend and interest income earned by comparing to recent experience; > Performed sensitivity analyses of key judgements to understand the materiality of the impact that potential realistic changes in assumptions may have, either individually or in combination, on the EIR asset; and > Assessed the sufficiency of the disclosures in the financial statements relating to significant estimates made in the EIR calculation, including disclosure of sensitivities. We concluded that, whilst there is significant judgement inherent in the unsecured EIR adjustment, the assumptions applied were within a
reasonable range based on past experience and future assumptions. Financial Statements We concluded that the disclosures in note 1 of the financial statements provide appropriate details of the degree and nature of estimation uncertainty and the impact on the financial statements of actual future customer experience differing from the assumptions made. Other Information 194 I Virgin Money Group Annual Report 2017
Independent auditors’ report to the members of Virgin Money Holdings (UK) plc
Report on the audit of the financial statements
Key audit matter How our audit addressed the key audit matter Impairment of loans and advances to customers We assessed and tested the design and operating effectiveness of See note 1 of the financial statements for the disclosure of the the controls over data flows, model governance and setting and related accounting policies and critical estimates and judgements, approval of key assumptions used in the provisioning process. and page 88 for the Audit Committee’s consideration of key financial As part of our detailed work, we: issues and judgements. > Assessed the provision calculation methodology applied in the The impairment provision of £59.4 million consists of provisions context of industry practice and the requirements of accounting of £12.1 million in relation to secured lending and £47.3 million standards; in relation to unsecured lending. Total loans and advances as at > Tested key assumptions used within the models to internal and 31 December 2017 relating to secured lending was £33.7 billion and external information where appropriate; £3.1 billion for unsecured lending. > Tested that the model calculations were consistent with our We focused on this area because Management make subjective understanding of the Group’s methodology and the requirements judgements over both the timing of recognition and the size of of accounting standards; and provisions for impairment of loans and advances. This judgement
includes considering the completeness of the provisions and whether > Examined the basis for the judgemental overlays made to the
any specific judgemental overlays are appropriate to recognise the results produced by models and assessing the rationale for the
impact of emerging trends not captured in the impairment models. adjustments, as well as considering the completeness of the overlays. The Group has developed historic data based models that derive
key assumptions used within the provision calculation such as We found the approach taken in relation to the Group’s impairment
probability of default (PD) and loss given default (LGD). The output of provisions to be consistent with the requirements of IAS 39 and
these models is then applied to the provision calculation with other judgements made were reasonable. information including the selection of an appropriate loss emergence period (LEP) and the exposure at default (EAD). Recognition of intangible assets We assessed the Group’s capitalisation policy to check that it met the See note 1 of the financial statements for the disclosure of the related requirements of IAS 38. accounting policies and also page 88 for the Audit Committee’s We tested the design and operating effectiveness of the control consideration of key financial issues and judgements. environment in relation to the recording and approval of project During 2017 certain technology project costs incurred by the Group costs which form the basis of capitalisation accounting entries. were capitalised. These projects require cash and non-cash resources We selected a sample of intangible assets and undertook the during development and management applies judgement in following procedures: considering whether or not costs should be capitalised in the context > Substantively tested a selection of costs including those related of IAS 38. to new projects to check that these meet the criteria of IAS 38 for As technology and customer expectations continue to change there capitalisation as intangible assets; is a risk that certain technology assets may not generate the return > Discussed material capitalised assets with management to identify that the Group had initially anticipated and therefore may be subject any that may be at higher risk of potential impairment; and to impairment. > Where higher risk items were noted, we discussed the asset and The Group’s total net book value of intangible assets was £128.4 related forecast economic benefits with management to inform our million as at 31 December 2017. independent consideration as to whether any possible impairment triggers existed. One item was noted by management as requiring impairment resulting in a charge of £4.8 million to the income statement. This is disclosed in note 19. We found the accounting treatment applied in recognising capitalised costs was consistent with the requirements of IAS 38 and we did not identify any material matters which we considered necessary to report to the Audit Committee. Virgin Money Group Annual Report 2017 I 195
Independent auditors’ report to the members of Strategic Report Virgin Money Holdings (UK) plc
Key audit matter How our audit addressed the key audit matter
Disclosure of impact of adoption of IFRS 9 We read the disclosure as set out in note 37 to assess its compliance Financial Results IFRS 9 became effective on 1 January 2018 and therefore does not with the requirements of IAS 8. We also tested the completeness and affect the Balance Sheet and Income Statement of the Group as at accuracy of data inputs for the Group’s material IFRS 9 models to 31 December 2017. identify any material inconsistencies with source system data. However, under the requirements of IAS 8, the Group is required to Our detailed work in auditing the estimated 2018 opening disclose the estimated impact that new accounting standards will impairment provisions included: have on initial adoption. > Reading model documentation papers and assessing the Group’s The Group has presented a transition disclosure in note 37. methodology and modelling approach in the context of our Management estimate that the transition to IFRS 9 will reduce understanding of IFRS 9; shareholders’ equity by approximately £35 million after deferred tax > Independently estimating model outputs based on the Group’s as at 1 January 2018. methodology and data for material IFRS 9 models and comparing The most significant impact of adopting IFRS 9 to the Group relates our outcomes with those of management; and to a change in the way that credit losses are recognised, moving from > Comparing macroeconomic forecasts used by the Group for IFRS 9 an incurred loss to an expected loss basis for financial instruments purposes with third party market information. Governance held at amortised cost. The estimation of expected credit losses (ECL) We found the disclosure in respect of the transition to IFRS 9 and the for the disclosure required in these 2017 financial statements has estimated impact this has on shareholders’ equity to be consistent required significant judgement to be applied in the development of with the requirements of accounting standards. lifetime PD, LGD and EAD. This has required a more complex provision calculation methodology based on the application of differing levels of forecasting of losses. This is dependent on whether a significant increase in credit risk has occurred, as well as an adjustment applied for the impact of multiple economic scenarios in the future. Risk Management Report How we tailored the audit scope related SPVs. As the statutory audit of subsidiaries is We tailored the scope of our audit to ensure that we performed undertaken concurrently with the Group audit, all five enough work to be able to give an opinion on the financial subsidiaries were designated as in-scope components for statements as a whole, taking into account the structure of Group audit purposes. Additionally, certain SPV balances the Group, the accounting processes and controls, and the were scoped in for audit on a line by line basis based on industry in which the Group operates. their proportion of the consolidated financial statement line item to ensure adequate overall audit coverage for each We updated our understanding of processes within the line item. 98% of interest income, 98% of profit before tax business in order to understand and evaluate the key financial (98% of the adjusted profit before tax figure as used for our processes and controls across the Group. Our audit plan was overall materiality calculation) and 99% of Total Assets were presented to the Audit Committee. Following our procedures, subject to audit. we were able to obtain sufficient appropriate audit evidence to Financial Statements form a basis for our audit opinion. In establishing the overall approach to the Group audit, we determined the type of work that needed to be performed over The consolidated financial statements include the Group’s five the components. All of the audit work was completed by the 100% owned subsidiaries as well as a number of securitisation Group engagement team. Other Information 196 I Virgin Money Group Annual Report 2017
Independent auditors’ report to the members of Virgin Money Holdings (UK) plc
Report on the audit of the financial statements
Materiality The scope of our audit was influenced by our application evaluating the effect of misstatements, both individually and of materiality. We set certain quantitative thresholds for in aggregate on the financial statements as a whole. materiality. These, together with qualitative considerations, Based on our professional judgement, we determined helped us to determine the scope of our audit and the nature, materiality for the financial statements as a whole as follows: timing and extent of our audit procedures on the individual financial statement line items and disclosures and in
Group financial statements Parent Company financial statements Overall materiality £13.4 million (2016: £9.8 million). £13.4 million (2016: £2.8 million). How we determined it 5% of adjusted profit before tax adjusted for £6.5 1% of total assets, capped to Group overall million of strategic items (as detailed in note 2), as materiality of £13.4 million these are not considered to be recurring. Rationale for benchmark applied This adjusted measure of profit is deemed as As the Company is not profit orientated on a solo- the most appropriate measure of underlying entity basis, we have used 1% of total assets, but business performance and hence an appropriate cap this to the lower materiality of the Group. benchmark upon which to base our materiality.
For each component in the scope of our Group audit, we whether the Directors considered it appropriate to adopt the allocated a materiality that is less than our overall Group going concern basis of accounting in preparing the financial materiality. The range of materiality allocated across statements and the Directors’ identification of any material components was between £0.02 million and £13.0 million. uncertainties to the Group’s and the Parent Company’s ability We agreed with the Audit Committee that we would report to to continue as a going concern over a period of at least twelve them misstatements identified during our audit above months from the date of approval of the financial statements. We have nothing material to add or to draw attention to. £0.67 million (Group audit) (2016: £0.49 million) and However, because not all future events or conditions can be £0.67 million (Parent Company audit) (2016: £0.14 million) as predicted, this statement is not a guarantee as to the Group’s well as misstatements below those amounts that, in our view, and Parent Company’s ability to continue as a going concern. warranted reporting for qualitative reasons. We are also required to report if the Directors’ statement Going concern relating to Going Concern in accordance with Listing Rule In accordance with ISAs (UK) we are required to report if we 9.8.6R(3) is materially inconsistent with our knowledge have anything material to add or draw attention to in respect obtained in the audit. We have nothing to report. of the Directors’ statement in the financial statements about Virgin Money Group Annual Report 2017 I 197
Independent auditors’ report to the members of Strategic Report Virgin Money Holdings (UK) plc
Reporting on other information
The other information comprises all of the information in the misstatement of the other information. If, based on the work Annual Report other than the financial statements and our we have performed, we conclude that there is a material Financial Results auditors’ report thereon. The Directors are responsible for the misstatement of this other information, we are required to other information. Our opinion on the financial statements report that fact. We have nothing to report based on these does not cover the other information and, accordingly, we do responsibilities. not express an audit opinion or, except to the extent otherwise With respect to the Strategic Report, Directors’ Report explicitly stated in this report, any form of assurance thereon. and Corporate Governance Statement, we also considered In connection with our audit of the financial statements, whether the disclosures required by the Companies Act 2006 our responsibility is to read the other information and, have been included. in doing so, consider whether the other information is Based on the responsibilities described above and our work materially inconsistent with the financial statements or our undertaken in the course of the audit, the Companies Act knowledge obtained in the audit, or otherwise appears to 2006 (CA06), ISAs (UK) and the Listing Rules of the Financial be materially misstated. If we identify an apparent material Conduct Authority (FCA) require us also to report certain Governance inconsistency or material misstatement, we are required to opinions and matters as described below (required by ISAs perform procedures to conclude whether there is a material (UK) unless otherwise stated). misstatement of the financial statements or a material
Strategic Report and Directors’ Report In our opinion, based on the work undertaken in the course of the audit, the information given in the Strategic Report and Directors’ Report for the year ended 31 December 2017 is consistent with the financial statements and has been prepared in accordance with applicable legal requirements. (CA06)
In light of the knowledge and understanding of the Group and Parent Company and their environment obtained in the course of the audit, we did Risk Management Report not identify any material misstatements in the Strategic Report and Directors’ Report. (CA06) Corporate Governance Statement In our opinion, based on the work undertaken in the course of the audit, the information on pages 81, 89 and 126 to 188 of the Annual Report about internal controls and risk management systems in relation to financial reporting processes, and in note 27 to the financial statements about share capital structures in compliance with rules 7.2.5 and 7.2.6 of the Disclosure Guidance and Transparency Rules sourcebook of the FCA (DTR) is consistent with the financial statements and has been prepared in accordance with applicable legal requirements. (CA06) In light of the knowledge and understanding of the Group and Parent Company and their environment obtained in the course of the audit, we did not identify any material misstatements in this information. (CA06) In our opinion, based on the work undertaken in the course of the audit, the information given on pages 71 to 94 of the Annual Report with respect to the Parent Company’s corporate governance code and practices and about its administrative, management and supervisory bodies and their committees complies with rules 7.2.2, 7.2.3 and 7.2.7 of the DTR. (CA06) We have nothing to report arising from our responsibility to report if a corporate governance statement has not been prepared by the Parent Financial Statements Company. (CA06) The Directors’ assessment of the prospects of the Group and of the principal risks that would threaten the solvency or liquidity of the Group We have nothing material to add or draw attention to regarding: > The Directors’ confirmation on page 132 of the Annual Report that they have carried out a robust assessment of the principal risks facing the Group, including those that would threaten its business model, future performance, solvency or liquidity; > The disclosures in the Annual Report that describe those risks and explain how they are being managed or mitigated; and > The Directors’ explanation on page 120 of the Annual Report as to how they have assessed the prospects of the Group, over what period they have done so and why they consider that period to be appropriate, and their statement as to whether they have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions. We have nothing to report having performed a review of the Directors’ statement that they have carried out a robust assessment of the principal
risks facing the Group and statement in relation to the longer-term viability of the Group. Our review was substantially less in scope than an audit Other Information and only consisted of making inquiries and considering the Directors’ process supporting their statements; checking that the statements are in alignment with the relevant provisions of the UK Corporate Governance Code (the Code); and considering whether the statements are consistent with the knowledge and understanding of the Group and Parent Company and their environment obtained in the course of the audit. (Listing Rules) 198 I Virgin Money Group Annual Report 2017
Independent auditors’ report to the members of Virgin Money Holdings (UK) plc
Reporting on other information
Other Code Provisions We have nothing to report in respect of our responsibility to report when: > The statement given by the Directors, on page 125, that they consider the Annual Report taken as a whole to be fair, balanced and understandable, and provides the information necessary for the members to assess the Group’s and Parent Company’s position and performance, business model and strategy is materially inconsistent with our knowledge of the Group and Parent Company obtained in the course of performing our audit; > The section of the Annual Report on pages 88 and 89 describing the work of the Audit Committee does not appropriately address matters communicated by us to the Audit Committee; and > The Directors’ statement relating to the Parent Company’s compliance with the Code does not properly disclose a departure from a relevant provision of the Code specified, under the Listing Rules, for review by the auditors. Directors’ Remuneration In our opinion, the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006. Responsibilities for the financial statements A further description of our responsibilities for the audit of and the audit the financial statements is located on the FRC’s website at: www.frc.org.uk/auditorsresponsibilities. This description Responsibilities of the Directors for the financial forms part of our auditors’ report. statements Use of this report As explained more fully in the Statement of Directors’ This report, including the opinions, has been prepared for responsibilities set out on page 124, the Directors are and only for the Parent Company’s members as a body in responsible for the preparation of the financial statements accordance with Chapter 3 of Part 16 of the Companies Act in accordance with the applicable framework and for being 2006 and for no other purpose. We do not, in giving these satisfied that they give a true and fair view. The Directors are opinions, accept or assume responsibility for any other also responsible for such internal control as they determine is purpose or to any other person to whom this report is shown necessary to enable the preparation of financial statements or into whose hands it may come save where expressly agreed that are free from material misstatement, whether due to by our prior consent in writing. fraud or error. In preparing the financial statements, the Directors are responsible for assessing the Group’s and the Parent Company’s ability to continue as a going concern, disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless the Directors either intend to liquidate the Group or the Parent Company or to cease operations, or have no realistic alternative but to do so. Auditors’ responsibilities for the audit of the financial statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors’ report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. Virgin Money Group Annual Report 2017 I 199
Independent auditors’ report to the members of Strategic Report Virgin Money Holdings (UK) plc
Other required reporting
Companies Act 2006 exception reporting Appointment
Under the Companies Act 2006 we are required to report to Following the recommendation of the audit committee, we Financial Results you if, in our opinion: were appointed by the members on 4 May 2016 to audit the > we have not received all the information and explanations we financial statements for the year ended 31 December 2016 require for our audit; or and subsequent financial periods. The period of total uninterrupted engagement is two years, covering the years > adequate accounting records have not been kept by the ended 31 December 2016 and 31 December 2017. Parent Company, or returns adequate for our audit have not been received from branches not visited by us; or > certain disclosures of Directors’ remuneration specified by law are not made; or > the Parent Company financial statements and the part of Catrin Thomas (Senior Statutory Auditor) the Directors’ Remuneration Report to be audited are not in for and on behalf of PricewaterhouseCoopers LLP agreement with the accounting records and returns. Chartered Accountants and Statutory Auditors Governance We have no exceptions to report arising from this Edinburgh responsibility. 26 February 2018 Risk Management Report Financial Statements Other Information 200 I Virgin Money Group Annual Report 2017
Consolidated income statement
For the year ended 31 December
2017 2016 Note £ million £ million Interest and similar income 958.0 948.1 Interest and similar expense (363.4) (425.7) Net interest income 3 594.6 522.4 Fee and commission income 29.6 28.8 Fee and commission expense – (1.2) Net fee and commission income 4 29.6 27.6 Other operating income 5 41.8 40.3 Fair value losses on financial instruments 13 (3.3) (8.9) Other income 68.1 59.0 Total income 662.7 581.4 Operating expenses 6 (355.9) (349.4) Profit before tax from operating activities 306.8 232.0 Impairment 8 (44.2) (37.6) Profit before tax 262.6 194.4 Taxation 9 (70.5) (54.3) Profit for the year 192.1 140.1
Profit attributable to equity owners 192.1 140.1 Profit for the year 192.1 140.1
Basic earnings per share (pence) 10 37.8 29.4 Diluted earnings per share (pence) 10 37.5 29.1
The accompanying notes are an integral part of these consolidated financial statements. Virgin Money Group Annual Report 2017 I 201
Consolidated statement of comprehensive income Strategic Report
For the year ended 31 December
2017 2016 Note £ million £ million Profit for the year 192.1 140.1 Other comprehensive income/(expense) Items that may subsequently be reclassified to profit or loss: Financial Results Movements in revaluation reserve in respect of available-for-sale financial assets: Change in fair value 29 14.1 44.4 Income statement transfers in respect of disposals 29 (13.5) (38.3) Taxation 29 (0.1) (1.7) 0.5 4.4 Movements in cash flow hedge reserve: Effective portion of changes in fair value taken to other comprehensive income 29 (1.2) (36.1) Net income statement transfers 29 12.6 13.6 Taxation 29 (2.6) 6.3
8.8 (16.2) Governance Other comprehensive income/(expense) for the year, net of tax 9.3 (11.8) Total comprehensive income for the year 201.4 128.3
Total comprehensive income attributable to equity owners 201.4 128.3
The accompanying notes are an integral part of these consolidated financial statements. Risk Management Report Financial Statements Other Information 202 I Virgin Money Group Annual Report 2017
Consolidated balance sheet
As at 31 December
2017 2016 Note £ million £ million Assets Cash and balances at central banks 2,579.0 786.3 Derivative financial instruments 13 78.8 104.2 Loans and receivables: > Loans and advances to banks 14 359.4 635.6 > Loans and advances to customers 15 36,740.2 32,367.1 > Debt securities 0.3 0.7 37,099.9 33,003.4 Available-for-sale financial assets 16 1,051.8 858.8 Intangible assets 19 128.4 80.6 Tangible fixed assets 20 74.5 77.4 Deferred tax assets 21 11.5 23.0 Other assets 22 83.9 121.9 Total assets 41,107.8 35,055.6 Virgin Money Group Annual Report 2017 I 203
Consolidated balance sheet (continued) Strategic Report
As at 31 December
2017 2016 Equity and liabilities Note £ million £ million Liabilities Deposits from banks 23 5,379.0 2,132.5 Customer deposits 24 30,808.4 28,106.3 Financial Results Derivative financial instruments 13 93.5 229.7 Debt securities in issue 25 2,736.9 2,600.0 Other liabilities 26 241.5 299.9 Current tax liabilities 23.6 16.7 Total liabilities 39,282.9 33,385.1 Equity Share capital and share premium 27 654.6 654.6 Other equity instruments 28 384.1 384.1 Other reserves 29 (18.1) (27.4)
Retained earnings 30 804.3 659.2 Governance Total equity 1,824.9 1,670.5 Total liabilities and equity 41,107.8 35,055.6
The accompanying notes are an integral part of these consolidated financial statements. The financial statements on pages 200 to 250 were approved and authorised for issue by the Board and were signed on its behalf on 26 February 2018. Risk Management Report
Glen Moreno Jayne-Anne Gadhia CBE Chair Chief Executive Financial Statements Other Information 204 I Virgin Money Group Annual Report 2017
Consolidated statement of changes in equity
For the year ended 31 December 2017
Attributable to equity holders Share capital and share Other equity Other Retained premium instruments reserves earnings Total equity £ million £ million £ million £ million £ million Balance at 1 January 2017 654.6 384.1 (27.4) 659.2 1,670.5 Comprehensive income Profit for the year – – – 192.1 192.1 Other comprehensive income Net movement in revaluation reserve in respect of – – 0.5 – 0.5 available-for-sale financial assets Net movement in cash flow hedge reserve – – 8.8 – 8.8 Total other comprehensive income – – 9.3 – 9.3 Total comprehensive income for the year – – 9.3 192.1 201.4 Transactions with equity holders Dividends paid to ordinary shareholders – – – (23.9) (23.9) Distribution to Additional Tier 1 security holders – – – (32.7) (32.7) Tax attributable to Additional Tier 1 securities – – – 8.4 8.4 Purchase of own shares – – – (8.5) (8.5) Share based payments – charge for the year (net of tax) – – – 9.9 9.9 Other distributions – – – (0.2) (0.2) Total transactions with equity holders – – – (47.0) (47.0) Balance at 31 December 2017 654.6 384.1 (18.1) 804.3 1,824.9
The accompanying notes are an integral part of these consolidated financial statements. Further details of movements in the Group’s share capital and reserves are provided in notes 27 to 30. Virgin Money Group Annual Report 2017 I 205
Consolidated statement of changes in equity Strategic Report
For the year ended 31 December 2016
Attributable to equity holders (continued) Share capital and share Other equity Other Retained premium instruments reserves earnings Total equity £ million £ million £ million £ million £ million
Balance at 1 January 2016 654.6 156.5 (15.6) 544.8 1,340.3 Financial Results Comprehensive income Profit for the year – – – 140.1 140.1 Other comprehensive income/(expense) Net movement in revaluation reserve in respect of – – 4.4 – 4.4 available-for-sale financial assets Net movement in cash flow hedge reserve – – (16.2) – (16.2) Total other comprehensive expense – – (11.8) – (11.8) Total comprehensive (expense)/income for the year – – (11.8) 140.1 128.3 Transactions with equity holders
Dividends paid to ordinary shareholders – – – (20.8) (20.8) Governance Distribution to Additional Tier 1 security holders – – – (12.6) (12.6) Tax attributable to Additional Tier 1 securities – – – 2.5 2.5 Purchase of own shares – – – (7.3) (7.3) Issue of Additional Tier 1 securities – 227.6 – – 227.6 Share based payments – charge for the year – – – 12.8 12.8 Deferred tax on share based payments – – – (0.3) (0.3)
Total transactions with equity holders – 227.6 – (25.7) 201.9 Risk Management Report Balance at 31 December 2016 654.6 384.1 (27.4) 659.2 1,670.5
The accompanying notes are an integral part of these consolidated financial statements. Further details of movements in the Group’s share capital and reserves are provided in notes 27 to 30. Financial Statements Other Information 206 I Virgin Money Group Annual Report 2017
Consolidated cash flow statement
For the year ended 31 December
2017 2016 Note £ million £ million Profit before taxation 262.6 194.4 Adjustments for: Changes in operating assets 34(a) (4,357.8) (5,387.3) Changes in operating liabilities 34(b) 5,806.6 3,957.3 Non-cash and other items 34(c) 48.2 60.3 Tax paid (45.1) (22.1) Net cash provided by/(used in) operating activities 1,714.5 (1,197.4) Cash flows from investing activities Purchase of securities (541.5) (670.0) Proceeds from sale and redemption of securities 497.1 1,150.0 Purchase and investment in intangible assets (74.3) (31.6) Purchase of tangible fixed assets (5.8) (8.6) Disposal of tangible fixed assets – 0.7 Net cash (used in)/provided by investing activities (124.5) 440.5 Cash flows from financing activities Dividends paid to ordinary shareholders 11 (23.9) (20.8) Distributions to Additional Tier 1 security holders (32.7) (12.6) Other distributions (0.2) – Net proceeds from issue of debt securities 25 746.2 1,278.9 Repayments of debt securities in issue 25 (608.3) (798.1) Purchase of own shares (8.5) (7.3) Issue of Additional Tier 1 securities (net of costs) – 227.6 Net cash provided by financing activities 72.6 667.7 Change in cash and cash equivalents 1,662.6 (89.2) Cash and cash equivalents at beginning of year 1,372.2 1,461.4 Cash and cash equivalents at end of year 34(d) 3,034.8 1,372.2 The accompanying notes are an integral part of these consolidated financial statements. Virgin Money Group Annual Report 2017 I 207
Notes to the consolidated financial statements Strategic Report
Note 1: Basis of preparation and accounting policies 1.1 Reporting entity disclosures have been provided in the notes to these financial Virgin Money Holdings (UK) plc (the Company) is a public statements on liabilities included within ‘financing activities’ limited company incorporated and registered in England in the consolidated and parent cash flow statements. and Wales. The registered office is Jubilee House, Gosforth, New accounting standards issued by the IASB that are Financial Results Newcastle-Upon-Tyne, NE3 4PL. relevant to the Group and effective in future periods are The Company was incorporated on 4 August 1995 as a presented in note 37. private limited company with registered number 03087587. 1.4 Presentation of information On 24 July 2014 the Company was re-registered as a public Presentation of risk and capital management disclosures limited company. Disclosures under IFRS 7 ‘Financial Instruments: Disclosure’ The Company is the parent entity and the ultimate controlling concerning the nature and extent of risks relating to party of the Virgin Money Group (the Group), which consists of financial instruments and under IAS 1 ’Presentation of the Company and its subsidiaries. financial statements’ concerning objectives, policies and 1.2 Basis of preparation processes for managing capital have been included within the audited sections of the Risk Management Report. Where The Group consolidated financial statements, which should
marked as ‘audited’ these are covered by the Independent Governance be read in conjunction with the Directors’ Report, have Auditors’ Report. been prepared on a going concern basis in accordance with International Financial Reporting Standards (IFRS) 1.5 Basis of consolidation as adopted by the EU, including interpretations issued The Group consists of the Company and its subsidiaries. by the IFRS Interpretations Committee, and with those The subsidiaries are listed in note 2 of the parent company parts of the Companies Act 2006 applicable to companies financial statements. The consolidated financial statements reporting under IFRS. comprise the financial statements of the Group. IFRS comprises accounting standards prefixed IFRS issued Entities are regarded as subsidiaries where the Group has the
by the International Accounting Standards Board (IASB) and power over an investee, exposure or rights to variable returns Risk Management Report those prefixed IAS issued by the IASB’s predecessor body from its involvement with the investee and the ability to affect as well as interpretations issued by the IFRS Interpretations those returns. Inter-company transactions and balances are Committee (IFRS IC) and its predecessor body. The eliminated upon consolidation. Subsidiaries are consolidated EU endorsed version of IAS 39 ‘Financial Instruments: from the date on which control is transferred to the Group Recognition and Measurement’ relaxes some of the hedge and are de-consolidated from the date that power over an accounting requirements; the Group has not taken advantage investee, exposure or rights to variable returns and the ability of this relaxation, and therefore there is no difference in to affect these returns ceases. Accounting policies are applied application to the Group between IFRS as adopted by the EU consistently across the Group. and IFRS as issued by the IASB. Special Purpose Vehicles (SPV) are entities created to The Directors have reviewed the strategic plan which shows accomplish a narrow and well defined objective. For the the financial position, cash flow, liquidity and capital forecasts Group this is the securitisation of mortgage assets. An SPV is for the Group. The Directors are confident that the Group consolidated if the Group has control over the SPV, through Financial Statements will have sufficient resources to meet its liabilities as they its exposure to variable returns from its involvement in the fall due and to continue to operate for a period of at least 12 SPV and the ability to affect those returns through its power months from the date of approval of the financial statements. over the entity. Accordingly the Directors believe that it remains appropriate The Virgin Money Foundation is classified as an associate. to prepare the financial statements on a going concern basis. 1.6 Basis of measurement 1.3 Changes in accounting policy The financial statements have been prepared under the New standards, amendments to standards and historical cost convention as modified by the revaluation interpretations adopted of derivative financial instruments and available-for-sale In 2017, the Group adopted amendments to existing standards financial assets held at fair value. A summary of the material that were endorsed for adoption by the EU and mandatory for accounting policies of the Group are included within note 1.9. Other Information annual reporting periods beginning on or after 1 January 2017. Policies which are relevant to the financial statements as a The adoption of the amendments to IAS 12 ‘Income Taxes’ had whole are set out below. no impact on these financial statements or the accounting The accounting policies have been applied consistently to all polices applied in their preparation. In adopting the periods presented in these financial statements. amendments to IAS 7 ‘Statement of cash flows’ reconciliation 208 I Virgin Money Group Annual Report 2017
Notes to the consolidated financial statements
Note 1: Basis of preparation and accounting policies (continued) 1.7 Client money the relevant period. The effective interest rate is the rate that The Group’s unit trust management and investment exactly discounts estimated future cash receipts or payments intermediary subsidiary administers money on behalf of through the expected life of the financial instrument or, where some clients in accordance with the Client Money Rules of the appropriate, a shorter period to the net carrying amount of Financial Conduct Authority. Client money is not recognised the financial asset or liability. The Group estimates cash flows in the balance sheet or in the notes to the financial statements considering all contractual terms of the financial instrument as the Group is not the beneficial owner. (for example prepayment options) but does not consider future credit losses. The calculation includes all amounts
1.8 Foreign currency translation received or paid by the Group that are an integral part of the The Group’s financial statements are presented in Sterling, overall return, direct incremental transaction costs related which is the functional currency of the Company, all of its to the acquisition or issue of a financial instrument, loan subsidiaries and the SPVs included within the consolidated commitment fees and all other premiums and discounts. financial statements. Once a financial asset or group of similar financial assets has Foreign currency transactions are translated into functional been written down as a result of an impairment loss, interest currency using the exchange rates prevailing at the dates of income is recognised on the written down carrying value using the transactions. Monetary items denominated in foreign the asset’s original effective interest rate, being the rate of currencies are translated at the rate prevailing at the balance interest used to discount the future cash flows for the purpose sheet date. Foreign exchange gains and losses resulting from of measuring the impairment loss. the restatement and settlement of such transactions are recognised in the income statement, except when recognised Interest receivable or payable on derivatives, whether in in other comprehensive income if relating to a qualifying economic or accounting hedges, is recorded on an accruals cash flow hedge or available-for-sale assets. Non-monetary basis in interest receivable or payable. Interest on available- items (which are assets or liabilities which do not attach to a for-sale (AFS) debt securities is recorded in interest receivable right to receive or an obligation to pay currency) measured using the effective interest rate method. at historical cost and denominated in foreign currencies are (c) Fees and commissions translated at the exchange rate at the date of the transaction. Where they are not included in the effective interest rate Non-monetary items measured at fair value are translated at calculation, fees and commissions are recognised on an the exchange rate at the date of valuation. Where these are accruals basis when the service has been received or provided. held at fair value through the income statement, exchange Income from general insurance and life insurance policies is differences are reported as part of the fair value gain or loss. recognised in full on the effective date of commencement or 1.9 Accounting policies renewal of the related policies to reflect underlying contracts The accounting policies of the Group are set out below. with product providers. (a) Operating segments (d) Other operating income The Group’s chief operating decision maker (which has been Other operating income comprises the fair value for services, determined by the Group to be the Executive Committee) net of value added tax, rebates and discounts. Other operating assesses performance and makes decisions regarding the income is attributable to the sale and management of stocks allocation of the Group’s resources, in accordance with IFRS 8 and shares ISAs, pensions, authorised unit trusts and other ‘Operating Segments’. All of the Group’s product lines are financial services products. managed under a single centralised commercial function, with Other operating income from sales of units in managed funds the Group’s performance assessed, and resource allocation is recognised daily based on the average volume of funds decisions made, on a centralised basis. Therefore the Group under management. has determined that it has only one reportable segment. Other income includes commission on donations and other The underlying basis is the basis on which financial sundry income. information is presented to the chief operating decision maker which excludes certain items included in profit or loss (e) Operating expenses determined under IFRSs as adopted by the EU. Operating expenses are recognised on an accruals basis as services are provided. Included within the employee benefits (b) Interest income and expense expense are employee share based payments. The accounting Interest income and expense are recognised in the income policy in relation to share based payments is set out in policy (f). statement for all instruments measured at amortised cost using the effective interest rate method. Staff costs The Group accounts for components of employee costs on the This method calculates the amortised cost of a financial asset following bases: or liability, and allocates the interest income or expense over Virgin Money Group Annual Report 2017 I 209
Notes to the consolidated financial statements Strategic Report
Note 1: Basis of preparation and accounting policies (continued) > Short-term employee benefits over the period that the employees become unconditionally Short-term employee benefits include salaries and social entitled to the awards (the vesting period). security costs and are recognised over the period in which the All awards granted under current schemes are conditional
employees provide the services to which the payments relate. shares which have service conditions. The Long Term Incentive Financial Results Cash bonus awards are recognised to the extent that the Plan awards also have non-market performance conditions. Group has a present obligation to its employees that can be No awards have market performance conditions and no share measured reliably and are recognised over the period that options have been granted in the current or prior year. employees are required to provide services. The employee expense is determined by reference to the > Other long-term employee benefits fair value of the number of shares that are expected to vest. The fair value of the shares granted is based on market Other long-term employee benefits include deferred cash prices at the date of award. The determination of fair values bonus awards. Deferred cash bonus awards are recognised excludes the impact of service conditions and any non- at the present value of the obligation at the reporting date. market performance conditions, which are included in the These costs are recognised over the period that employees are assumptions used to estimate the number of shares that are required to provide services. expected to vest. At each balance sheet date, this estimate > Retirement benefit obligations is reassessed and if necessary revised. Any revision of the Governance original estimate is recognised in the income statement, A defined contribution plan is a post-employment benefit together with a corresponding adjustment to equity. plan into which the Group pays fixed contributions and has no legal or constructive obligation to pay further amounts. (g) Impairment losses Contributions are recognised as staff expenses in profit or The Group assesses its financial assets or groups of financial loss in the periods during which related employee services assets for objective evidence of impairment at each balance are fulfilled. sheet date. An impairment loss is recognised if a loss event (or events) has occurred after initial recognition, and on or before The Group operates defined contribution pension schemes
the balance sheet date, that has an impact on the estimated Risk Management Report for its Directors and employees. The assets of the schemes future cash flows of the financial assets or groups of financial are held separately from those of the Group in independently assets that can be reliably measured. Losses incurred as a administered funds. result of events occurring after the balance sheet date are not Leases recognised in these financial statements. If the lease agreement in which the Group is a lessee transfers > Loans and receivables at amortised cost the risks and rewards of the asset, the lease is recorded as a finance lease and the related asset is capitalised. At inception, The Group assesses whether objective evidence of impairment the asset is recorded at the lower of the present value of the exists individually for financial assets that are individually minimum lease payments or fair value and is depreciated over significant. Financial assets that are not individually the estimated useful life. The lease obligations are recorded significant are assessed on a collective basis, except for such as borrowings. assets where there are specific circumstances indicating
evidence of impairment (for example loans that have entered Financial Statements If the lease does not transfer the risks and rewards of the possession or where fraud has been committed). asset, the lease is recorded as an operating lease. Objective evidence that a financial asset is impaired includes Operating lease payments are charged to profit or loss on observable data that comes to the attention of the Group a straight line basis over the lease term unless a different about the following loss events: systematic basis is more appropriate. Where an operating lease is terminated before the lease period has expired, any > there is evidence of the customer or issuer experiencing payment required to be made to the lessor in compensation financial difficulty; is charged to profit or loss in the period in which > there is a breach of contract, such as a default or delinquency termination is made. in repayments; (f) Share based payments > the customer is granted a concession that would otherwise The Group operates a number of equity settled share based not be considered; Other Information payment schemes in respect of services received from certain of its employees. > the borrower will enter bankruptcy or other financial reorganisation; The value of the employee services received in exchange for awards granted under these schemes is recognised as an > the disappearance of an active market for that financial asset employee expense with a corresponding increase in equity because of financial difficulties; and 210 I Virgin Money Group Annual Report 2017
Notes to the consolidated financial statements
Note 1: Basis of preparation and accounting policies (continued) > observable data indicating that there is a measurable decrease Available-for-sale financial assets in the estimated future cash flows from a portfolio of assets The Group assesses at each balance sheet date whether since the initial recognition of those assets, although the there is objective evidence that a financial asset is impaired. decrease cannot yet be identified with the individual financial The loss is measured as the difference between the asset’s assets in the portfolio, including: acquisition cost less principal repayments and amortisation and the current fair value. The impairment loss is recognised – there are adverse changes in the payment status of borrowers in the portfolio; and in profit or loss. This includes cumulative gains and losses previously recognised in other comprehensive income – economic conditions that correlate with defaults on the which are recycled from other comprehensive income to the assets in the portfolio. income statement. If the Group determines that no objective evidence of If, in a subsequent period, the fair value of a debt instrument impairment exists for an individually assessed financial asset, classified as available-for-sale increases and the increase whether significant or not, it includes the asset in a group can be objectively related to an event occurring after of financial assets with similar credit risk characteristics the impairment loss was recognised in profit or loss, the and collectively assesses them for impairment. In assessing impairment loss is reversed through profit or loss. Impairment collective impairment for retail assets the Group uses losses recognised in profit or loss on equity instruments are statistical modelling of historic trends to assess the not reversed through profit and loss. probability of a group of financial assets going into default and the subsequent loss incurred. Regular model monitoring is (h) Taxation performed to ensure model assumptions remain appropriate. Taxation comprises current tax and deferred tax. Current tax and deferred tax are recognised in profit or loss except to the Assets that are individually assessed and for which an extent that they relate to items recognised directly in equity impairment loss is or continues to be recognised are not or other comprehensive income. Current tax is based on the included in a collective assessment of impairment. taxable income or loss for the year, using tax rates enacted If there is objective evidence that an impairment loss on loans or substantively enacted at the reporting date, and any and receivables has been incurred, the amount of the loss adjustment to tax payable in respect of previous years. The is measured as the difference between the asset carrying Group has adopted the Code of Practice on Taxation for Banks amount and the present value of the estimated future cash issued by HM Revenue & Customs. flows (excluding future credit losses that have not been Deferred tax is recognised in respect of temporary differences incurred) discounted at the financial asset’s original effective between the carrying amounts of assets and liabilities for interest rate. The carrying amount of the asset is reduced financial reporting purposes and the amounts used for through the use of an impairment allowance and the amount taxation purposes. Deferred tax is measured at the tax rates of the loss is recognised in profit or loss. that are expected to be applied to temporary differences when When a loan or receivable is uncollectible, it is written off they reverse, based on the laws that have been enacted or against the related allowance for loan impairment. Such substantively enacted by the reporting date. loans are written off after all the necessary procedures Deferred tax assets are recognised for unused tax losses, tax have been completed and the amount of the loss has been credits and deductible temporary differences, to the extent determined. Subsequent recoveries of amounts previously that it is probable that future taxable profits will be available written off are recognised directly in the income statement. against which they can be utilised. Deferred tax assets are If, in a subsequent period, the amount of the impairment reviewed at each reporting date and are reduced to the extent loss decreases and the decrease can be related objectively that it is no longer probable that the related tax benefit to an event occurring after the impairment was recognised will be realised. (such as an improvement in the customer’s credit rating), the previously recognised impairment loss is reversed by adjusting (i) Earnings per share the impairment allowance. The amount of the reversal is Basic earnings per share is calculated by dividing the profit recognised in profit or loss. attributable to ordinary shareholders of the parent company by the weighted-average number of ordinary shares An allowance is also made in the case of accounts which outstanding during the period excluding own shares held in may not currently be in arrears, where losses may have employee benefit trusts or held for trading. been incurred but not yet recognised. An increased allowance is held for accounts where an impairment trigger The diluted earnings per share is calculated by adjusting profit event has occurred which includes accounts benefitting or loss that is attributable to ordinary shareholders and the from forbearance and those in arrears. Refer to the Risk weighted-average number of ordinary shares outstanding Management Report for details of the forbearance policy. for the effects of all dilutive potential ordinary shares, which comprise share options and awards granted to employees. Virgin Money Group Annual Report 2017 I 211
Notes to the consolidated financial statements Strategic Report
Note 1: Basis of preparation and accounting policies (continued) For the calculation of diluted earnings per share the weighted- prices. They are initially measured at fair value including average number of ordinary shares in issue is adjusted to direct and incremental transaction costs. Fair values are assume conversion of all dilutive potential ordinary shares, if obtained from quoted market prices in active markets and, any, that arise in respect of share options and rewards granted where these are not available, from valuation techniques to employees. The number of shares that could have been including discounted cash flow models (refer policy (m)). Financial Results acquired at the average annual share price of the Company’s With the exception of certain unquoted equity instruments shares based on the monetary value of the subscription measured at cost less impairment because their fair value rights attached to outstanding share options and awards cannot be measured reliably, subsequent measurement is is determined. This is deducted from the number of shares at fair value, with changes in fair value being recognised issuable under such options and awards to leave a residual in other comprehensive income except for impairment bonus amount of shares which are added to the weighted- losses and translation differences, which are recognised average number of ordinary shares in issue, but no adjustment in profit or loss. Upon derecognition of the asset, or where is made to the profit attributable to equity shareholders. there is objective evidence that the investment security
(j) Financial instruments is impaired, the cumulative gains and losses recognised
Financial assets in other comprehensive income are removed from other comprehensive income and recycled to profit or loss. Management determines the classification of its financial Governance instruments at initial recognition. > Held to maturity financial assets In line with IAS 39 ‘Financial Instruments: Recognition and Held to maturity financial assets are non-derivative financial Measurement’, financial assets can be classified in the assets with fixed or determinable payments that the Group following categories: has the ability and intention to hold to maturity. No financial > loans and receivables; assets were classified as held to maturity during either the current or prior year. > available-for-sale; > Financial assets at fair value through profit or loss
> held to maturity; or Risk Management Report This category consists of derivative financial assets. Assets > financial assets at fair value through profit or loss. in this category are carried at fair value. The fair values of Purchases and sales of financial assets at fair value through derivative instruments are calculated by discounted cash profit or loss, held to maturity and available-for-sale are flow models using yield curves that are based on observable recognised on the trade date, the date on which the Group market data or are based on valuations obtained from commits to purchase or sell the asset. counterparties. Gains and losses arising from the changes in the fair values are recognised in the income statement or > Loans and receivables at amortised cost other comprehensive income (refer policy (n)). The Group’s loans and advances to banks and customers, and Financial liabilities asset backed securities for which there is no active market, The Group measures all of its financial liabilities at amortised are classified as loans and receivables. Loans and receivables cost, other than derivatives and those instruments which have are non-derivative financial assets with fixed or determinable
been designated as part of a hedging relationship (refer policy Financial Statements payments that are not quoted in an active market, whose (n)). Borrowings, including deposits and debt securities in issue recoverability is based solely on the credit risk of the customer are recognised initially at fair value, being the issue proceeds and where the Group has no intention of trading the loan net of premiums, discounts and transaction costs incurred. or receivable. Loans and receivables are initially recognised All borrowings are subsequently measured at amortised cost at fair value including direct and incremental transaction using the effective interest rate method. Amortised cost is costs. Subsequent recognition is at amortised cost using adjusted for the amortisation of any premiums, discounts and the effective interest rate method, less any provision transaction costs. The amortisation is recognised in interest for impairment. expense and similar charges using the effective interest rate > Available-for-sale financial assets method. The Group does not hold any financial liabilities Available-for-sale financial assets are non-derivative assets classified as held for trading. that are either designated as available-for-sale or are assets
Offsetting financial instruments Other Information that do not meet the definition of loans and receivables Financial assets and liabilities are offset and the net amount and are not derivatives or assets held at fair value through reported in the balance sheet when there is a legally profit or loss. These are principally, but not exclusively, enforceable right to offset the recognised amounts and there investment securities intended to be held for an indefinite is an intention to settle on a net basis, or realise the asset and period of time which may be sold in response to a need for settle the liability simultaneously. liquidity or changes in interest rates, exchange rates or equity 212 I Virgin Money Group Annual Report 2017
Notes to the consolidated financial statements
Note 1: Basis of preparation and accounting policies (continued) Sale and repurchase agreements The Group’s derivative activities are entered into for the Securities sold subject to repurchase agreements (repos) are purpose of matching or eliminating risk from potential reclassified in the financial statements as assets pledged movements in interest rates, foreign exchange rates and when the transferee has the right by contract or custom to equity exposures inherent in the Group’s assets, liabilities and sell or repledge the collateral. The counterparty liability is positions. All derivative transactions are for economic hedging included in deposits from banks or customer deposits, as purposes and it is decided at the outset which position the appropriate. Securities purchased under agreements to resell derivative will be hedging. Derivatives are reviewed regularly (reverse repos) are recorded as loans and advances to banks for their effectiveness as hedges and corrective action or customers as appropriate. The difference between sale taken, if appropriate. Derivatives are measured initially and repurchase price is treated as interest and accrued over and subsequently at fair value. Fair values are calculated the life of the agreements using the effective interest rate by discounted cash flow models using yield curves that are method. Securities lent to counterparties are also retained in based on observable market data or are based on valuations the financial statements. obtained from counterparties. Where derivatives are not Derecognition of financial assets and liabilities designated as part of an accounting hedge relationship, Derecognition is the point at which the Group ceases to changes in fair value are recorded in the income statement. recognise an asset or liability on its balance sheet. The Where derivatives are designated within accounting hedge Group’s policy is to derecognise financial assets only when relationships, the treatment of the changes in fair value the contractual right to the cash flows from the financial depends on the nature of the hedging relationship as asset expires or when the Group transfers the financial assets explained below. to another party provided the transfer of the asset also Hedge accounting is used for derivatives designated in this transfers the right to receive the cash flows of the financial way provided certain criteria are met. The Group documents asset or where the Group has transferred substantially all the at the inception of the accounting hedge relationship the link risks and rewards of ownership. Where the transfer does not between the hedging instrument and the hedged item as well result in the Group transferring the right to receive the cash as its risk management objective and strategy for undertaking flows of the financial assets, but it does result in the Group various hedge transactions. The Group also documents its assuming a corresponding obligation to pay the cash flows assessment both at inception and on an ongoing basis of to another recipient, the financial assets are also accordingly whether the derivatives used in hedging transactions are derecognised. The Group derecognises financial liabilities only highly effective in offsetting changes in the fair values or when the obligation specified in the contract is discharged, cash flows of hedged items. The Group designates certain converted to shares, cancelled or has expired or is transferred derivatives as either: to a third party. There were no transactions in the year where > Cash flow hedges the Group transferred financial assets that should have been derecognised in their entirety. A cash flow hedge is used to hedge exposures to variability in cash flows, such as variable rate financial assets and liabilities. (k) Loans and advances to banks The effective portion of changes in the derivative fair value is The Group’s loans and advances to banks are classified as recognised in other comprehensive income, and recycled to loans and receivables. the income statement in the periods when the hedged item (l) Loans and advances to customers will affect profit and loss. Interest rate derivatives designated The Group’s loans and advances to customers are classified as as cash flow hedges primarily hedge the exposure to cash flow loans and receivables. vulnerability from forecast loans and advances to customers. (m) Available-for-sale financial assets The fair value gain or loss relating to the ineffective portion is The Group’s debt securities and equity instruments are recognised immediately in profit or loss. classified as available-for-sale assets. Equity instruments are > Fair value hedges classified as available-for-sale because they do not meet the A fair value hedge is used to hedge exposures to variability definition of loans and receivables, have no defined maturity in the fair value of financial assets and liabilities, such as dates and are not derivatives or assets held at fair value fixed rate loans. Changes in fair value of derivatives that are through profit or loss. designated and qualify as fair value hedges are recorded in (n) Derivative financial instruments and hedge accounting the income statement, together with any changes in the fair The Group is authorised to undertake the following types of value of the hedged asset or liability that are attributable to derivative financial instrument transactions for non-trading the hedged risk. If the hedge no longer meets the criteria for purposes: cross currency swaps, interest rate swaps, equity hedge accounting, the adjustment to the carrying amount of swaps, interest rate caps, forward rate agreements, options, the hedged item is amortised to the income statement over foreign exchange contracts and similar instruments. the period to maturity. Virgin Money Group Annual Report 2017 I 213
Notes to the consolidated financial statements Strategic Report
Note 1: Basis of preparation and accounting policies (continued) The most frequently used fair value hedges are: Financial liabilities are carried at amortised cost using the > hedging the interest rate risk of a portfolio of prepayable fixed effective interest rate method. Equity instruments are initially rate assets with interest rate derivatives. This solution is used recognised at net proceeds, after deducting transaction costs and any related income tax. Appropriations to holders of
to establish a macro fair value hedge for derivatives hedging Financial Results fixed rate mortgages; equity securities are deducted from equity, net of any related income tax, as they become irrevocably due to the holders of > hedging the interest rate risk of a portfolio of non-prepayable the securities. fixed rate liabilities with interest rate derivatives. This solution is used to establish a macro fair value hedge for derivatives Securitisation is a means used by the Group to fund an hedging fixed rate savings; element of its mortgage portfolio. These securitised advances are subject to non-recourse finance arrangements. These > hedging the interest rate risk of non-prepayable fixed rate advances have been transferred at their principal value assets with interest rate derivatives. This solution is used to to Special Purpose Vehicles (SPV) and have been funded establish micro fair value hedges for fixed rate investments; through the issue of amortising mortgage backed securities and to investors. > hedging the interest rate and foreign currency exchange risk In accordance with note 1.5, the Group has assessed that it of non-prepayable, foreign currency denominated fixed rate controls the SPVs and therefore consolidates the assets and Governance assets or liabilities on a one-for-one basis with fixed/floating liabilities of the SPVs, on a line by line basis. or floating/fixed cross currency interest rate swaps. This solution is used to establish micro fair value hedges for foreign (p) Funding for Lending Scheme currency denominated fixed rate investments. The Group participates in the Bank of England’s Funding for Lending Scheme (FLS). The scheme allows the Group to (o) Securitisation transactions receive Treasury bills in return for eligible collateral, including Certain Group companies have issued debt securities in approved portfolios of loans and advances to customers. order to finance specific loans and advances to customers. Receipt of Treasury bills under the FLS does not involve the Both the debt securities in issue and the loans and advances Risk Management Report to customers remain on the Group balance sheet within the substantial transfer of the risks and rewards on the collateral, appropriate balance sheet headings unless: or the right to receive its related cash flows, hence the derecognition criteria outlined in policy (j) are not satisfied. > a fully proportional share of all or of specifically identified Therefore the collateral assets will continue to be recognised cash flows have been transferred to the holders of the debt in the financial statements and the Treasury bills are not securities, in which case that proportion of the assets are separately recognised. derecognised; In the event that Treasury bills are utilised for repo > substantially all the risks and rewards associated with the transactions, the related collateral assets are categorised as assets have been transferred, in which case the assets are fully pledged assets and the associated liability to the counterparty derecognised; and is recognised in the financial statements. > a significant proportion of the risks and rewards have been (q) Intangible assets and amortisation transferred, in which case the assets are recognised only to the Intangible assets purchased separately from a business Financial Statements extent of the Group’s continuing involvement. combination are capitalised at their cost and amortised The Group has also entered into self-issuance of securitised from the date from which they become available for use debt which may be used as collateral for repurchase or over their useful economic life which is generally 3 to 10 similar transactions. Investments in self-issued debt and years. Intangible assets acquired as part of an acquisition the equivalent deemed loan, together with the related are capitalised at their fair value where this can be measured income, expense and cash flows, are not recognised in the reliably in accordance with IFRS 13 ‘Fair Value Measurement’. financial statements. Expenditure incurred in relation to scoping, planning and > Debt securities in issue researching the build of an asset as part of a project is expensed as incurred. Issued securities are classified as financial liabilities where the contractual arrangements result in the Group having an Development expenditure incurred on a project is capitalised Other Information obligation to deliver either cash or another financial asset only if the following criteria are met: to the security holder, or to exchange financial instruments > an asset is created that can be identified; under conditions that are potentially unfavourable to the Group. Issued securities are classified as equity where they > it is probable that the asset created will generate future meet the definition of equity and confer a residual interest in economic benefits; and the Group’s assets on the holder of the securities. > the development cost of the asset can be measured reliably. 214 I Virgin Money Group Annual Report 2017
Notes to the consolidated financial statements
Note 1: Basis of preparation and accounting policies (continued) Following the initial recognition of development expenditure, (r) Tangible fixed assets and depreciation the cost is amortised over the estimated useful lives of the Tangible fixed assets are stated at cost less accumulated assets created. Amortisation commences on the date that the depreciation and provision for impairment, as appropriate. asset is brought into use. Cost includes the original purchase price of the asset and Internally generated intangible assets relate to computer the costs attributable to bringing the asset to its working software and core banking platforms. condition for its intended use. Additions and subsequent expenditure are included in the asset’s carrying value or are > Computer software recognised as a separate asset only when they improve the Costs incurred in acquiring and developing computer software expected future economic benefits to be derived from the for internal use are capitalised as intangible assets where asset. All other repairs and maintenance are charged to the the software leads to the creation of an identifiable non- income statement in the period in which they are incurred. monetary asset and it is probable that the expected future Depreciation is provided using the straight line method to economic benefits that are attributable to the asset will flow allocate costs less residual values over estimated useful to the Group from its use for a period of over one year. The lives, as follows: software is classified as an intangible asset where it is not an integral part of the related hardware and amortised over its Freehold property 50-100 years estimated useful life on a straight line basis which is generally Leasehold property Unexpired 3 to 10 years. period of the lease Costs associated with maintaining software are expensed as Plant and leasehold improvements 5-30 years they are incurred. Computer equipment 3-5 years > Banking platforms Office equipment 3-10 years Banking platforms primarily represent the construction Motor vehicles 4 years of operating platforms, which are internally generated. Banking platforms are amortised on a straight line basis over The residual values and useful lives of assets are reviewed, and 3 to 10 years. adjusted if appropriate, at each balance sheet date. Where the cost of freehold land can be identified separately from > Impairment of intangible assets buildings, the land is not depreciated. Intangible assets are assessed for indications of impairment > Impairment of tangible fixed assets at each balance sheet date, or more frequently where required by events or changes in circumstances. If indications Tangible fixed assets are assessed for indications of of impairment are found, these assets are subject to an impairment at each balance sheet date, or more frequently impairment review. The impairment review compares the where required by events or changes in circumstances. If carrying value of the assets with their recoverable amounts, indications of impairment are found, these assets are subject which are defined as the higher of the fair value less costs to an impairment review. The impairment review compares to sell and their value in use. Fair value less costs to sell is the carrying value of the assets with their recoverable amount, the amount at which the asset could be sold in a binding which are defined as the higher of the fair value less costs agreement in an arm’s length transaction. Value in use is to sell and their value in use. Fair value less costs to sell is calculated as the discounted cash flows generated as a result the amount at which the asset could be sold in a binding of the asset’s continued use including those generated by its agreement in an arm’s length transaction. Value in use is ultimate disposal, discounted at a market rate of interest on a calculated as the discounted cash flows generated as a result pre-tax basis. of the asset’s continued use including those generated by its ultimate disposal, discounted at a market rate of interest on a Where impairments are indicated, the carrying values of pre-tax basis. intangible assets are written down by the amount of the impairment and the charge is recognised in the income Where impairments are indicated, the carrying values of fixed statement in the period in which it occurs. A previously assets are written down by the amount of the impairment and recognised impairment charge on an asset may be reversed in the charge is recognised in the income statement in the period full or in part through the income statement where a change in which it occurs. A previously recognised impairment charge in circumstances leads to a change in the estimates used to on an asset may be reversed in full or in part through the income determine its recoverable amount. The carrying value will only statement where a change in circumstances leads to a change be increased to the value at which it would have been held had in the estimates used to determine its recoverable amount. The the impairment not been recognised. carrying value will only be increased to the value at which it would have been held had the impairment not been recognised. Virgin Money Group Annual Report 2017 I 215
Notes to the consolidated financial statements Strategic Report
Note 1: Basis of preparation and accounting policies (continued) (s) Other assets > Share issue costs Other assets include prepayments and other amounts the Incremental costs directly attributable to the issue of new Group is due to receive from third parties in the normal shares or options are shown in equity as a deduction, net of course of business.
tax, from the proceeds. Financial Results (t) Deposits from banks > Dividends Deposits from banks are initially measured at fair value, which is normally the proceeds received net of any directly Dividends are recognised in equity in the period in which they attributable transaction costs incurred. Subsequent are approved by the Company’s shareholders or paid. measurement is at amortised cost, using the effective > Share premium interest rate method. Share premium substantially represents the aggregate of (u) Customer deposits all amounts that have ever been paid above par value to the Customer deposits are initially measured at fair value, which is Company when it has issued Ordinary and Deferred Shares. normally the proceeds received. Subsequent measurement is Certain expenses in relation to the issue of share capital at amortised cost, using the effective interest rate method. can be offset against the share premium account. These expenses must be the incremental expenses arising on issue
(v) Provisions Governance Provisions are recognised for present obligations arising of the shares. from past events where it is more likely than not that an (y) Other equity instruments outflow of resources will be required to settle the obligations Issued financial instruments are recognised as equity where and they can be estimated reliably. Provisions for levies are there is no contractual obligation to deliver either cash or recognised when the conditions that trigger the payment of another financial asset. The proceeds are included in equity, the levy are met. net of transaction costs. Distributions and other returns to (w) Other liabilities equity holders are treated as a deduction from equity. Deferred income represents amounts received in advance (z) Other reserves of the Group providing services, and will be recognised as > Revaluation reserve in respect of available-for-sale Risk Management Report income in profit or loss when the services have been provided. financial assets Trade creditors and accruals represent amounts the Group is The revaluation reserve in respect of available-for-sale due to pay to third parties in the normal course of business. financial assets represents the unrealised change in These include expense accruals, which have been incurred, but the fair value of available-for-sale investments since not yet billed. Accrued expenses are amounts that the Group initial recognition. is due to pay to third parties in the normal course of business. > Cash flow hedge reserve (x) Share capital and share premium For derivatives designated in a cash flow hedge, the effective > Share capital portion of changes in fair value is recognised in the cash flow The financial instruments issued by the Company are treated hedge reserve and recycled to profit or loss in the periods as equity (i.e. forming part of shareholders’ funds) only to the when the hedged item will affect profit or loss. Financial Statements extent that they meet the following two conditions: (aa) Contingent liabilities > they include no contractual obligations upon the Company Contingent liabilities are possible obligations whose existence to deliver cash or other financial assets or to exchange depends upon the outcome of uncertain future events or financial assets or financial liabilities with another party under are present obligations where the outflows of resources conditions that are potentially unfavourable to the Group; and are uncertain or cannot be reliably measured. Contingent > where the instrument will or may be settled in the Company’s liabilities are not recognised in the financial statements but own equity instruments, it is either a non-derivative that are disclosed unless they are remote. includes no obligation to deliver a variable number of the (ab) Fair value of financial assets and liabilities Company’s own equity instruments or is a derivative that will Fair value is defined as the price that would be received to sell be settled by the Company exchanging a fixed amount of cash an asset or paid to transfer a liability in an orderly transaction
or other financial assets for a fixed number of its own equity between market participants at the measurement date in the Other Information instruments. principal, or in its absence, the most advantageous market To the extent that this definition is not met, the proceeds of to which the Group has access at that date. The fair value issue are classified as a financial liability. of a liability reflects its non-performance risk (the risk the Group will not fulfil an obligation), including the Group’s own credit risk. 216 I Virgin Money Group Annual Report 2017
Notes to the consolidated financial statements
Note 1: Basis of preparation and accounting policies (continued) For the majority of instruments, fair value is determined with In the event that these estimates are revised at a later date, reference to quoted prices in an active market. A market is a present value adjustment may be recognised in profit and regarded as active if transactions for the asset or liability take loss. This adjustment includes an element that adjusts income place with sufficient frequency and volume to provide pricing previously recognised, as well as an element that adjusts information on an ongoing basis. for future interest not yet recognised. Such adjustments Where quoted prices are not available, fair value is based upon can introduce significant volatility. As such the EIR method cash flow models, which use wherever possible independently introduces a source of estimation uncertainty. Management sourced observable market parameters such as interest rate consider the most material risk of adjustment to be in relation yield curves, currency rates and option volatilities. The chosen to the application of EIR to the Group’s credit card portfolio. valuation technique incorporates all the factors that market The Group offers a range of credit card products. Interest participants would take into account in pricing a transaction income is recorded under the EIR method, which provides and is discounted at a risk free rate. a level yield over the life of the card. Management model Refer to note 32 for a description of different levels within the expected future cash flows over the estimated customer life, fair value hierarchy. Levels are reviewed at each balance sheet restricted to a maximum of seven years, which is supported date and this determines whether transfers between levels by observed experience. Income recognition can differ are required. significantly from actual cash receipts over that period. Similarly, the selection of expected life for modelling purposes The best evidence of the fair value of a financial instrument also has a material bearing on the EIR rate used for each at initial recognition is normally the transaction price – i.e. cohort. A shorter modelling period results in a lower rate for the fair value of consideration given or received. The Group income recognition. If the modelled period had been restricted does not apply a credit valuation adjustment (CVA) or to five years at origination, the profit for the year would have debit valuation adjustment (DVA) to reflect the credit risk been reduced by approximately £25.2 million in 2017 and of its derivative exposures as the Group’s portfolio is fully £15.8 million in 2016. collateralised. As at 31 December 2017 the EIR method gave rise to an If an asset or a liability measured at fair value has a bid price adjustment of £159.8 million (2016: £81.8 million) to the and an ask price, the Group measures assets at bid price and balance sheet value of unsecured loans. This adjustment liabilities at ask price. represented 5.3% (2016: 3.3%) of the balance sheet carrying 1.10 Critical estimates and judgements value of unsecured loans. The movement in the year of The preparation of financial statements in conformity £78.0 million was recognised as interest income. with IFRS requires Management to make estimates and In the calculation of EIR, Management uses estimates and judgements in the application of accounting policies that assumptions of future customer behaviour. These include the affect the reported amounts of assets, liabilities, income and estimation of utilisation of available credit, transaction and expense. Estimates and judgements are based on historical repayment activity and the retention of the customer balance experience and Management’s best knowledge of the amount. after the end of a promotional period. Should Management’s Due to the inherent uncertainty in making estimates and current estimation of future cash flows be inaccurate to the judgements, actual results in future periods may be based on extent that the original effective interest rates on unsecured amounts which differ from those estimates. lending cohorts were all reduced by 0.1%, the present value (a) Critical assumptions and sources of estimation adjustment to interest income, in relation to the revised uncertainty future cash flows, would be approximately £(10.2) million as at The following areas are the critical assumptions concerning 31 December 2017. the future and the key sources of estimation uncertainty in A significant proportion of the Group’s credit card portfolio the reporting period. These areas may have a significant risk includes customers within promotional periods. The level of causing a material adjustment to the carrying amounts of of repayment immediately post promotional period is a key assets and liabilities within the next financial year: sensitivity within the EIR assumptions. There is evidence to > Effective interest rates support the expected behaviour of customers after the end of promotional periods, however there is inherent risk that For financial instruments recorded at amortised cost, IAS 39 this data may not be indicative of actual future behaviour. If requires interest to be measured under the effective interest the proportion of customers who repay their balance post- rate (EIR) method. For the Group this includes interest promotion differs to Management’s estimate it can have a income earned on mortgages and credit cards, as well as material impact on the revised future cash flows. interest expense paid on wholesale liabilities. The EIR rate is determined at inception based upon Management’s best estimate of the future cash flows of the financial instrument. Virgin Money Group Annual Report 2017 I 217
Notes to the consolidated financial statements Strategic Report
Note 1: Basis of preparation and accounting policies (continued) To illustrate this, Management have undertaken a sensitivity Fair value of financial assets and liabilities on post-promotion payment rates for all cohorts which are Management must use estimation when calculating the fair still within their promotional periods at the end of 2017. For value of financial instruments categorised as level 2 and level these cohorts, should the payment rate be 10% higher than 3 (as defined by IFRS 13). In these instances the necessary forecast for the six months following end of promotion, valuation inputs are not observable and/or specific factors Financial Results Management estimate this would result in a negative present may need to be considered. Details of the Group’s level 2 and value adjustment to interest income of approximately £(30.8) level 3 financial instruments are included in note 32. million as at 31 December 2017. In such an adjustment, The most significant area of estimation uncertainty relates £(11.5) million would relate to write-off of income previously to the Group’s level 2 derivative financial instruments, recognised, and £(19.3) million would adjust for future interest where valuations are not derived from quoted prices. The not yet recognised. accuracy of fair value calculations would be affected by Impairment of loans and receivables unexpected market movements and any inaccuracies within Management must make a best estimate of losses incurred the discounted cash flow models used, particularly use of at the balance sheet date when determining the appropriate incorrect interest yield curves. For example, to the extent the allowance for impairment of loans and receivables. Judgement interest yield curve differed by +/- 10 bps, the net impact on is required when individually assessing loans for impairment fair values of derivative financial instruments would be an Governance and significant estimation is required when using statistical estimated increase of £41.5 million (2016: £33.1 million) or models for collective assessment. The key assumptions decrease of £41.7 million (2016: £33.3 million) respectively. used within the statistical models are based on behavioural (b) Critical judgements in applying accounting policies and arrears status. These variables include measurement The following are the critical judgements that have been made of probability of default, probability that default results in in the process of applying the Group’s accounting policies that charge-off or possession, and any subsequent loss incurred have the most significant effect on the amount recognised in in that event. In relation to measuring incurred loss the the financial statements: estimation of the period over which incurred losses emerge is also an area of estimation uncertainty. Capitalisation of intangibles and assessment for Risk Management Report impairment Management consider that the measurement of allowance Significant judgement is required when assessing whether the for impairment for a retail bank is a critical estimate. Whilst conditions of IAS 38 have been met to allow the capitalisation the estimates used to determine the appropriate balance of project development costs as an intangible asset. During sheet allowance are not currently considered to be a source the reporting period the Group has incurred significant costs of material uncertainty, it is acknowledged that the Group in relation to the development of the Group’s digital banking has observed historically low levels of customer arrears and programme. Following a detailed review of the programme default. Material change in future customer behaviours and and the nature of the costs incurred, Management have unanticipated changes in the economic environment could determined that the amount of £38.3 million meets the result in higher losses being incurred in future periods. recognition criteria for capitalisation as an intangible asset. The most significant estimation within the measurement of Separately, Management judgement is required in assessing Financial Statements the secured impairment allowance is considered to be the whether capitalised intangible assets or assets not yet in use estimation of house prices. To the extent that house prices exhibit any indicators of impairment at the reporting date. differed adversely or positively by 10%, the impairment If there are indicators of impairment, an estimate of the allowance would be an estimated £1.7 million higher (2016: recoverable amount is made which may indicate the need for £1.3 million) or £3.2 million lower (2016: £2.6 million) at an impairment charge to be recognised. Management have 31 December 2017. assessed and reviewed intangible assets for the existence In relation to the measurement of the unsecured impairment of impairment indicators. This exercise identified previous allowance, the estimation of the period over which incurred software development, with a carrying value of £4.8 million, losses emerge is considered to be the most significant which was discontinued in the year in light of a strategic estimation. To the extent that the emergence period of six decision to consolidate activities within the digital banking months differs by +/-3 months, the impairment allowance programme. An impairment charge of £4.8 million was would be an estimated £7.1 million higher (2016: £5.9 million) recognised in the financial statements (2016: £nil). Other Information or £7.1 million lower (2016: £5.9 million) respectively. 218 I Virgin Money Group Annual Report 2017
Notes to the consolidated financial statements
Note 2: Segmental analysis and reconciliation to underlying basis The Group falls within the scope of IFRS 8 ‘Operating Segments’. The Group’s chief operating decision maker (which has been determined to be the Executive Committee) assesses performance and makes decisions based on the performance of the Group as a whole. The Group has therefore determined that it has one reportable operating segment and is therefore not required to produce additional segmental disclosure. The Group operates in a single geographic segment, being the UK. The Group is not reliant on a single customer.
Reconciliation of statutory results to underlying basis The underlying basis is the basis on which financial information is presented to the chief operating decision maker which excludes certain items included in the statutory results, of which further information is provided on page 48. The table below reconciles the statutory results to the underlying basis.
Adjusted for Fair value IPO losses on Statutory share based Strategic financial Underlying results awards items instruments basis £m £m £m £m £m Year ended 31 December 2017 Net interest income 594.6 – – – 594.6 Other income 68.1 – – 3.3 71.4 Total income 662.7 – – 3.3 666.0 Total operating expenses (355.9) 0.9 6.5 – (348.5) Profit before tax from operating activities 306.8 0.9 6.5 3.3 317.5 Impairment (44.2) – – – (44.2) Profit before tax 262.6 0.9 6.5 3.3 273.3
Adjusted for Fair value IPO losses on Statutory share based Strategic Simplification financial Underlying results awards items costs instruments basis £m £m £m £m £m £m Year ended 31 December 2016 Net interest income 522.4 – (3.4) – – 519.0 Other income 59.0 – – – 8.9 67.9 Total income 581.4 – (3.4) – 8.9 586.9 Total operating expenses (349.4) 2.0 5.8 5.6 – (336.0) Profit before tax from operating activities 232.0 2.0 2.4 5.6 8.9 250.9 Impairment (37.6) – – – – (37.6) Profit before tax 194.4 2.0 2.4 5.6 8.9 213.3 Virgin Money Group Annual Report 2017 I 219
Notes to the consolidated financial statements Strategic Report
Note 3: Net interest income
2017 2016 £m £m Interest and similar income:
Loans and advances to customers 945.2 933.1 Financial Results Loans and advances to banks 0.9 2.3 Interest receivable on loans and receivables 946.1 935.4 Available-for-sale financial assets 5.6 8.9 Cash and balances at central banks 6.3 3.8 Total interest and similar income 958.0 948.1 Interest and similar expense: Deposits from banks (16.5) (7.6) Customer deposits (310.8) (370.7) Debt securities in issue (31.0) (40.6) Governance Other (5.1) (6.8) Total interest and similar expense (363.4) (425.7) Net interest income 594.6 522.4
Interest accrued on impaired assets was £7.1 million (2016: £5.8 million).
Note 4: Net fee and commission income
2017 2016 Risk Management Report £m £m Fee and commission income: On loans and advances to customers 21.3 19.5 Other fee and commission income 8.3 9.3 Total fee and commission income 29.6 28.8 Fee and commission expense: Other fee and commission expense – (1.2) Net fee and commission income 29.6 27.6 Financial Statements Other Information 220 I Virgin Money Group Annual Report 2017
Notes to the consolidated financial statements
Note 5: Other operating income
2017 2016 £m £m Investment and pension income 32.0 31.7 Gains on sale of available-for-sale financial assets 8.4 6.8 Other 1.4 1.8 Total other operating income 41.8 40.3
Note 6: Operating expenses
2017 2016 £m £m Staff costs: Wages and salaries 161.9 160.7 Social security costs 15.5 14.6 Other pension costs 10.9 10.7 Employee share schemes 9.9 12.8 198.2 198.8 Premises and equipment: Hire of equipment 4.6 4.6 Rent and rates 14.4 14.3 Other property costs 11.0 9.6 30.0 28.5 Other expenses: Marketing costs 21.8 21.0 Telecommunications and IT 18.5 17.4 Professional fees 23.1 20.0 Other 29.1 42.7 92.5 101.1 Depreciation, amortisation and impairment: Depreciation of tangible fixed assets 8.7 5.6 Amortisation of intangible assets 21.7 15.4 Impairment of intangible assets 4.8 – 35.2 21.0 Total operating expenses 355.9 349.4 Virgin Money Group Annual Report 2017 I 221
Notes to the consolidated financial statements Strategic Report
Note 6: Operating expenses (continued) Average headcount Retirement benefit obligations The monthly average number of persons (including Directors) The Group operates defined contribution pension schemes employed by the Group during the year was as follows: for its Directors and employees. The assets of the schemes
are held separately from those of the Group in independently Financial Results 2017 2016 administered funds. Full time 2,413 2,394 The Group made contributions of £10.9 million (2016: Part time 811 746 £10.7 million) during the year. There were no contributions Total 3,224 3,140 overdue at the year end (2016: £nil).
Fees payable to the auditors During the year the Group obtained the following services from the Group’s auditors as detailed below:
2017 2016 £m £m
Fees payable for the audit of the Company’s current year Annual Report and Accounts 0.2 0.2 Governance Audit of the subsidiaries pursuant to legislation 1.1 0.7 Total audit fees 1.3 0.9 Audit-related assurance services 0.2 0.2 Total audit and audit-related fees 1.5 1.1 Other non-audit fees: Other services 0.1 0.1 Total other non-audit fees 0.1 0.1 Risk Management Report Total fees payable to the auditors by the Group 1.6 1.2
All amounts are shown exclusive of VAT. The following types of services are included in the categories listed above: Audit and audit-related fees This category includes fees in respect of the audit of the Group’s Annual Report and Accounts and other services in connection with regulatory filings and services for assurance and related services that are reasonably related to the performance of the audit or review of the financial statements. Financial Statements Other Information 222 I Virgin Money Group Annual Report 2017
Notes to the consolidated financial statements
Note 7: Share based payments All share based payments charges relate to equity settled schemes. The scheme details are summarised below.
Award plan Eligible employees Nature of award Vesting conditions1 Issue dates2 (A) Long-term incentive Selected senior Conditional share Continuing employment or leavers in certain 2015, 2016 & plan employees award circumstances and achievement of performance 2017 conditions (B) Deferred bonus Selected senior Deferred bonus – Continuing employment or leavers in certain 2014, 2015, share plan employees conditional share circumstances 2016 & 2017 award (C) Phantom share Selected senior Deferred bonus – Continuing employment or leavers in certain 2012 & 2013 award employees conditional share circumstances award (D) IPO incentive Selected senior Conditional share Continuing employment or leavers in certain 2013 scheme employees award circumstances (E) Recruitment award Two senior Conditional share Continuing employment or leavers in certain 2013 employees award circumstances (F) IPO share award All employees Conditional share Continuing employment or leavers in certain 2014 excluding the award circumstances Group’s Executive Committee
1 All awards have vesting conditions and therefore some may not vest. 2 Issue dates show the year in which issues have been made under the relevant scheme. There could be further issuances in future years under the scheme. (A) Long-term incentive plan (LTIP) Share awards for the deferred element of 2017 bonuses will be The LTIP introduced in 2014 is aimed at delivering shareholder granted under this scheme in 2018. value by linking the receipt of shares to performance During 2017, selected senior employees of the Group were measures that are based on delivering the Group’s strategic granted up to a maximum of 1,833,349 Ordinary Shares under objectives over a 3 year period. Awards are made within limits the scheme. This number includes an award granted to senior set by the rules of the plan. employees who joined the Company in 2017 in recognition of The performance period for the 2015 awards ended on outstanding awards over shares in their previous employing 31 December 2017. Based on performance against the targets company that lapsed on accepting employment with the set, 65.3 per cent of the 2015 awards will vest. Group. Awards granted under the scheme have service During 2017, selected senior employees of the Group were conditions, with vesting dates prescribed for each participant. granted up to a maximum of 1,382,905 Ordinary Shares The weighted-average fair value of awards granted during under the LTIP scheme. Awards granted under the LTIP have 2017 was £3.26 based on market prices at the date of grant. performance and service conditions, with vesting dates (C) – (F) Phantom share award, IPO incentive scheme, prescribed for each participant. Recruitment award and IPO share award The weighted-average fair value of awards granted during These schemes relate to awards issued in previous 2017 was £3.27 based on market prices at the date of grant. years. No awards were granted under these schemes in (B) Deferred bonus share plan 2017 (2016: none). The deferred bonus share plan is an equity settled scheme that is operated in conjunction with the short-term incentive plan for Executive Directors and other senior managers of the Group. Virgin Money Group Annual Report 2017 I 223
Notes to the consolidated financial statements Strategic Report
Note 7: Share based payments (continued) Movement in share options and conditional shares Ordinary Shares Interest Long-term Deferred Phantom in share incentive bonus share share IPO share Financial Results options1 plan plan award award Shares in existence at 1 January 2017 625,328 2,651,338 2,098,649 2,044,480 68,920 Granted in year – 1,382,905 1,833,349 – – Exercised or vested in year – (47,021) (1,105,235) (1,480,940) (66,304) Forfeited in year – (153,464) (124,782) – (2,616) Outstanding 31 December 2017 625,328 3,833,758 2,701,981 563,540 – Of which exercisable 625,328 – – – –
Ordinary Shares
Interest Long-term Deferred Phantom Governance in share incentive bonus share share IPO incentive Recruitment IPO share options1 plan plan award scheme award award Shares in existence at 1 January 625,328 1,399,453 1,157,800 3,061,820 332,334 175,810 139,041 2016 Granted in year – 1,572,717 1,695,266 – – – – Exercised or vested in year – (98,349) (754,417) (950,550) (305,676) (175,810) (68,885) Forfeited in year – (222,483) – (66,790) (26,658) – (1,236)
Outstanding 31 December 625,328 2,651,338 2,098,649 2,044,480 – – 68,920 Risk Management Report 2016 Of which exercisable 625,328 – – – – – –
1 This scheme was set up for Sir David Clementi, who was Chairman for the period from October 2011 to May 2015. All share options granted under the scheme had vested prior to 1 January 2016. No share options have been exercised during 2017 or 2016. The weighted-average exercise price for options outstanding at 1 January 2017 and 31 December 2017 was £2.15. The options outstanding will expire 10 years from the date of listing if not exercised. Financial Statements Other Information 224 I Virgin Money Group Annual Report 2017
Notes to the consolidated financial statements
Note 8: Allowance for impairment losses on loans and receivables
2017 2016 On On On secured unsecured On secured unsecured loans loans Total loans loans Total £m £m £m £m £m £m At 1 January 10.6 39.5 50.1 8.7 31.2 39.9 Advances written off (0.7) (34.2) (34.9) (0.8) (26.6) (27.4) Charge to the income statement 2.2 42.0 44.2 2.7 34.9 37.6 As at 31 December 12.1 47.3 59.4 10.6 39.5 50.1
Of the total allowance in respect of loans and advances to customers, £57.5 million (2016: £49.4 million) was assessed on a collective basis.
Note 9: Taxation (A) Analysis of the tax charge for the year 2017 2016 £m £m UK corporation tax Current tax on profit for the year (63.5) (40.3) Adjustments in respect of prior years (0.6) 0.4 Current tax charge (64.1) (39.9) Deferred tax (refer note 21) Origination and reversal of temporary differences (6.9) (14.0) Adjustments in respect of prior years 0.9 (0.2) Reduction in UK corporation tax rate (0.4) (0.2) Deferred tax charge to the income statement (6.4) (14.4) Tax charge (70.5) (54.3) Virgin Money Group Annual Report 2017 I 225
Notes to the consolidated financial statements Strategic Report
Note 9: Taxation (continued) Analysis of tax charge recognised in Other Comprehensive Income: 2017 2016 £m £m
Current tax Financial Results Cash flow hedge reserve 2.4 4.9 Deferred tax Revaluation reserve in respect of available-for-sale financial assets (0.1) (1.7) Cash flow hedge reserve (5.0) 1.4 Total (charge)/credit (2.7) 4.6
(B) Factors affecting the tax charge for the year A reconciliation of the charge that would result from applying the standard UK corporation tax rate to the profit before tax to the actual tax charge for the year is given below: Governance 2017 2016 £m £m Profit before tax 262.6 194.4 Tax charge at standard tax rate of 19.25% (2016: 20%) (50.5) (38.9) Factors affecting charge: Disallowed items (1.0) (1.8) Bank corporation tax surcharge (18.9) (12.5)
UK corporation tax rate change (0.4) (0.2) Risk Management Report Deferred tax charge in respect of share schemes – (1.1) Adjustments in respect of prior years 0.3 0.2 Total tax charge (70.5) (54.3)
The main rate of corporation tax reduced from 20% to 19% on 1 April 2017, and will reduce further to 17% on 1 April 2020 in accordance with the Finance Act 2016. The charge in respect of the corporation tax surcharge for banks which was introduced from 1 January 2016 is £18.9 million in the year ended 31 December 2017. The surcharge imposes an 8% charge on the banking profits of the Group (less a £25 million allowance against those profits). Financial Statements Other Information 226 I Virgin Money Group Annual Report 2017
Notes to the consolidated financial statements
Note 10: Earnings per share
2017 2016 £m £m Profit attributable to equity owners – basic and diluted 192.1 140.1 Distributions to Additional Tier 1 security holders (net of tax) (24.8) (10.1) Profit attributable to equity shareholders for the purposes of basic and diluted EPS 167.3 130.0
2017 2016 Number Number of shares of shares (million) (million) Weighted-average number of ordinary shares in issue – basic 442.1 442.8 Adjustment for share options and awards 3.8 4.7 Weighted-average number of ordinary shares in issue – diluted 445.9 447.5 Basic earnings per share (pence) 37.8 29.4 Diluted earnings per share (pence) 37.5 29.1
Basic earnings per share has been calculated after deducting 2.8 million (2016: 1.7 million) ordinary shares representing the weighted-average of the Group’s holdings of own shares in respect of employee share schemes. Of the total number of employee share options and share awards at 31 December 2017 none were anti-dilutive (2016: nil).
Note 11: Dividends An interim dividend of 1.9 pence (2016: 1.6 pence) per Ordinary Share, amounting to £8.4 million (2016: £7.1 million), was paid in September 2017 and a final dividend in respect of the year ended 31 December 2016 of 3.5 pence (31 December 2015: 3.1 pence) per Ordinary Share amounting to £15.5 million (31 December 2015: £13.7 million), was paid in May 2017. These dividends were deducted from retained profits in the current year. The Directors have recommended for approval at the 2018 AGM the payment of a final dividend in respect of the year ended 31 December 2017 of 4.1 pence per ordinary share, amounting to £18.1 million. If approved, this final dividend will be paid on 16 May 2018 to shareholders on the register at close of business on 6 April 2018. The financial statements for the year ended 31 December 2017 do not reflect this final dividend, which will be accounted for in shareholders’ equity as an appropriation of retained profits in the year ending 31 December 2018. Under the trust deed of the Employee Benefit Trust (EBT), a standing waiver is in force in respect of any dividends declared on shares held by the EBT. Virgin Money Group Annual Report 2017 I 227
Notes to the consolidated financial statements Strategic Report
Note 12: Analysis of financial assets and financial liabilities by measurement basis
Derivatives Derivatives designated not as hedging instruments
Held at Available- designated Financial Results amortised Loans and for-sale as hedging Fair value Cash flow cost receivables securities instruments hedges hedges Total £m £m £m £m £m £m £m As at 31 December 2017 Financial assets Cash and balances at central banks – 2,579.0 – – – – 2,579.0 Derivative financial instruments – – – 11.9 11.5 55.4 78.8 Loans and receivables: > Loans and advances to banks – 359.4 – – – – 359.4 > Loans and advances to customers – 36,740.2 – – – – 36,740.2 Governance > Debt securities – 0.3 – – – – 0.3 Available-for-sale financial assets – – 1,051.8 – – – 1,051.8 Other assets – 55.0 – – – – 55.0 Total financial assets – 39,733.9 1,051.8 11.9 11.5 55.4 40,864.5 Non financial assets 243.3 Total assets 41,107.8 Financial liabilities
Deposits from banks 5,379.0 – – – – – 5,379.0 Risk Management Report Customer deposits 30,808.4 – – – – – 30,808.4 Derivative financial instruments – – – 10.7 82.5 0.3 93.5 Debt securities in issue 2,736.9 – – – – – 2,736.9 Other liabilities 215.1 – – – – – 215.1 Total financial liabilities 39,139.4 – – 10.7 82.5 0.3 39,232.9 Non financial liabilities 50.0 Total liabilities 39,282.9 Equity 1,824.9 Total liabilities and equity 41,107.8 Financial Statements Other Information 228 I Virgin Money Group Annual Report 2017
Notes to the consolidated financial statements
Note 12: Analysis of financial assets and financial liabilities by measurement basis (continued)
Derivatives Derivatives designated not as hedging instruments Held at Available- designated amortised Loans and for-sale as hedging Fair value Cash flow cost receivables securities instruments hedges hedges Total £m £m £m £m £m £m £m As at 31 December 2016 Financial assets Cash and balances at central banks – 786.3 – – – – 786.3 Derivative financial instruments – – – 18.5 21.0 64.7 104.2 Loans and receivables: > Loans and advances to banks – 635.6 – – – – 635.6 > Loans and advances to customers – 32,367.1 – – – – 32,367.1 > Debt securities – 0.7 – – – – 0.7 Available-for-sale financial assets – – 858.8 – – – 858.8 Other assets – 68.8 – – – – 68.8 Total financial assets – 33,858.5 858.8 18.5 21.0 64.7 34,821.5 Non financial assets 234.1 Total assets 35,055.6 Financial liabilities Deposits from banks 2,132.5 – – – – – 2,132.5 Customer deposits 28,106.3 – – – – – 28,106.3 Derivative financial instruments – – – 22.9 206.8 – 229.7 Debt securities in issue 2,600.0 – – – – – 2,600.0 Other liabilities 189.5 – – – – – 189.5 Total financial liabilities 33,028.3 – – 22.9 206.8 – 33,258.0 Non financial liabilities 127.1 Total liabilities 33,385.1 Equity 1,670.5 Total liabilities and equity 35,055.6 Virgin Money Group Annual Report 2017 I 229
Notes to the consolidated financial statements Strategic Report
Note 13: Derivative financial instruments The fair values and notional amounts of assets and liabilities recognised within Derivative financial instruments are set out in the following table.
As at 31 December 2017 As at 31 December 2016 Financial Results Contract/ Contract/ notional Asset Liability notional Asset Liability amount fair value fair value amount fair value fair value £m £m £m £m £m £m Derivatives in accounting hedge relationships Derivatives designated as fair value hedges: Interest rate derivatives (gross) 23,314.7 61.7 (91.0) 21,584.8 34.7 (219.8) Less: contracts centrally cleared (17,360.6) (50.2) 8.5 (8,194.1) (13.7) 13.0 Interest rate derivatives (net) 5,954.1 11.5 (82.5) 13,390.7 21.0 (206.8) Derivatives designated as cash flow hedges:
Interest rate derivatives (gross) 1,199.0 – (2.9) 1,287.0 3.5 (2.2) Governance Less: contracts centrally cleared (1,199.0) – 2.9 (1,287.0) (3.5) 2.2 Interest rate derivatives (net) – – – – – – Currency derivatives 705.6 55.4 (0.3) 520.3 64.7 – Total derivative assets/(liabilities) – 6,659.7 66.9 (82.8) 13,911.0 85.7 (206.8) in accounting hedge relationships Derivatives in economic hedging relationships but not in accounting hedge relationships Interest rate derivatives (gross) 7,205.6 9.6 (10.4) 7,549.6 15.7 (24.0) Risk Management Report Less: contracts centrally cleared (2,830.7) (0.8) 2.8 (3,665.1) (2.5) 9.2 Interest rate derivatives (net) 4,374.9 8.8 (7.6) 3,884.5 13.2 (14.8) Currency derivatives 76.0 3.0 (3.1) 56.0 3.4 (3.8) Equity and other options 25.7 0.1 – 149.5 1.9 (4.3) Total derivative assets/(liabilities) – 4,476.6 11.9 (10.7) 4,090.0 18.5 (22.9) in economic hedging relationship but not in accounting hedge relationships Total recognised derivative 11,136.3 78.8 (93.5) 18,001.0 104.2 (229.7) assets/(liabilities)
The notional amount of the contract does not represent the Group’s real exposure to credit risk which is limited to the current cost of replacing contracts with a positive value to the Group should the counterparty default. To reduce credit risk the Group Financial Statements uses a variety of credit enhancement techniques such as netting and collateralisation, where security is provided against the exposure. Further details are provided in the Risk Management Report on page 155. The fair values and notional amounts shown in the line ‘Total recognised derivative assets/(liabilities)’ above reflect amounts relating only to contracts that are not centrally cleared. Centrally cleared interest rate derivatives are set off in the balance sheet as they meet the offsetting criteria under IAS 32 (refer note 33).
Hedged cash flows For designated cash flow hedges the following table shows when the Group’s hedged cash flows are expected to occur and when they will impact income:
2017 2016 Other Information £m £m Within one year (7.2) (9.2) In one to five years (15.5) (22.3) Total (22.7) (31.5) 230 I Virgin Money Group Annual Report 2017
Notes to the consolidated financial statements
Note 13: Derivative financial instruments (continued) Fair value losses on financial instruments 2017 2016 £m £m Fair value gains/(losses) from derivatives designated as fair value hedges 104.8 (69.9) Fair value (losses)/gains from underlying hedged risk (99.4) 81.8 Fair value gain from fair value hedge accounting¹ 5.4 11.9 Fair value losses from cash flow hedges (12.6) (13.6) Fair value gains/(losses) from other derivatives² 3.9 (7.2) Fair value losses on financial instruments (3.3) (8.9)
1 Gains or losses from fair value hedges can arise where there is an IAS 39 hedge accounting relationship in place and either: – the fair value of the derivative was not exactly offset by the change in fair value attributable to the hedged risk; or – the derivative was designated in or dedesignated from the IAS 39 hedge accounting relationship and in the following months leads to amortisation of existing balance sheet positions. 2 Other derivatives are those used for economic hedging but which are not in an IAS 39 hedge accounting relationship. Note 14: Loans and advances to banks
2017 2016 £m £m Balances within securitisation vehicles 201.0 354.3 Money market placements with banks 13.8 33.0 Cash collateral pledged to banks (refer note 17) 93.0 181.1 Other lending to banks 51.6 67.2 Total loans and advances to banks 359.4 635.6
Note 15: Loans and advances to customers
2017 2016 £m £m
Advances secured on residential property not subject to securitisation 21,878.7 19,375.2 Advances secured on residential property subject to securitisation 5,438.5 4,907.8 27,317.2 24,283.0 Residential buy-to-let loans not subject to securitisation 6,367.3 5,468.4 Total loans and advances to customers secured on residential property 33,684.5 29,751.4 Unsecured receivables not subject to securitisation 3,071.4 2,486.6 Total loans and advances to customers before allowance for impairment losses 36,755.9 32,238.0 Allowance for impairment losses on loans and receivables (refer note 8) (59.4) (50.1) Total loans and advances to customers excluding portfolio hedging 36,696.5 32,187.9 Fair value of portfolio hedging 43.7 179.2 Total loans and advances to customers 36,740.2 32,367.1
The fair value of portfolio hedging represents an accounting adjustment which offsets the fair value movement on derivatives designated in IAS 39 hedge accounting relationships with the mortgage portfolio. Such relationships are established to protect the Group from interest rate risk on fixed rate products. For collateral held in respect of the values included in the table above, refer to the Risk Management Report. Virgin Money Group Annual Report 2017 I 231
Notes to the consolidated financial statements Strategic Report
Note 16: Available-for-sale financial assets
2017 2016 £m £m At 1 January 858.8 1,296.9
Additions 690.9 670.0 Financial Results Disposals (sales and redemptions) (483.2) (1,111.1) Exchange differences 1.2 0.1 Changes due to amortisation and accrued interest (5.0) (11.6) Net (losses)/gains on changes in fair value (10.9) 14.5 At 31 December 1,051.8 858.8
Gains on sale of available-for-sale securities amounted to £8.4 million (2016: £6.8 million). Analysis of the composition of debt securities categorised as available-for-sale financial assets is set out in the Risk Management Report on page 154. All assets have been individually assessed for impairment and following this assessment no
write down of assets was required. Governance
Note 17: Collateral pledged and received The Group receives and accepts collateral in the form of cash comprising £181.1 million recognised within loans and and marketable securities in respect of derivatives, sale and advances to banks and £53.9 million within other assets) and repurchase and reverse sale and repurchase agreements, and £53.9 million (2016: £14.0 million) has been received as cash secured loans. collateral by the Group, of which £13.0 million is recognised Collateral in respect of derivatives is subject to the standard within deposits from banks (2016: £14.0 million) and industry terms of ISDA Credit Support Annex. This means that £40.9 million within other liabilities (2016: £nil). Risk Management Report securities received or given as collateral can be pledged or At 31 December 2017 available-for-sale financial assets of sold during the term of the transaction but must be returned £nil (2016: £10.6 million) are pledged as collateral in respect of on maturity of the transaction. The terms also give each derivative transactions. counterparty the right to terminate the related transactions At 31 December 2017 loans and advances of £6,219.8 million upon the counterparty’s failure to post collateral. (2016: £2,302.3 million) are pledged as collateral in respect At 31 December 2017 cash collateral of £101.5 million of secured loans and sale and repurchase agreements under had been pledged by the Group, comprising £93.0 million terms that are usual and customary for such activities. recognised within loans and advances to banks and £8.5 million within other assets (2016: £235.0 million, Financial Statements Other Information 232 I Virgin Money Group Annual Report 2017
Notes to the consolidated financial statements
Note 18: Securitisation Securitisation programmes Loans and advances to customers include loans securitised under the Group’s Gosforth securitisation programmes, which have been sold by Virgin Money plc to bankruptcy remote SPVs. The transfers of the mortgage loans to the structured entities are not treated as sales by the Group. No gain or loss has been recognised on pledging the mortgages to the programmes. The SPVs are principally engaged in providing long-term funding to the Group through the issue of amortising mortgage backed securities to investors on terms whereby the majority of the risks and rewards of the loans and advances are retained by Virgin Money plc. As a result, the SPVs are fully consolidated in these financial statements and all of the loans and advances are retained on the Group’s balance sheet, with the related securities included within debt securities in issue.
2017 2016 Loans and Loans and advances Securities in advances Securities in securitised issue securitised issue £m £m £m £m Residential mortgage loans 5,438.5 5,132.7 4,907.8 4,616.7 Less: securities held by the Group – (2,698.6) – (2,322.5) Total securitisation programmes 5,438.5 2,434.1 4,907.8 2,294.2
The full liabilities associated with the securitisation programme (excluding the proportion relating to securities retained) are recognised within debt securities in issue. However, the Group’s obligations are limited to the cash flows generated from the underlying securitised assets. At the reporting date the Group had over-collateralised the securitisation transactions, as set out in the table above, to meet the terms of the transaction and to provide operational flexibility. In addition, the Group held cash deposits and permitted investments of £350.4 million (2016: £354.3 million) supporting the securities issued. To satisfy transaction requirements the Group may provide additional support to the SPV in the form of increased cash reserves funded by further subordinated loans. Transfers of financial assets There were no transactions in the year involving the transfer of financial assets that were derecognised by the Group but with ongoing exposure (2016: none). There were also no transactions in the year where the Group transferred assets that should have been derecognised in their entirety (2016: none). As noted above, loans and advances transferred to SPVs do not represent transfers of financial assets by the Group as all of the SPVs are consolidated in these financial statements. Virgin Money Group Annual Report 2017 I 233
Notes to the consolidated financial statements Strategic Report
Note 19: Intangible assets
Core deposit Banking intangible Software platforms Total £m £m £m £m Financial Results Cost: At 1 January 2016 4.8 85.1 21.5 111.4 Additions – 31.6 – 31.6 Disposals – (2.1) – (2.1) At 31 December 2016 4.8 114.6 21.5 140.9 Additions – 36.0 38.3 74.3 Disposals – (5.7) – (5.7) At 31 December 2017 4.8 144.9 59.8 209.5 Accumulated amortisation and impairment:
At 1 January 2016 3.4 40.7 2.9 47.0 Governance Charge for the year 1.4 10.4 3.6 15.4 Disposals – (2.1) – (2.1) At 31 December 2016 4.8 49.0 6.5 60.3 Charge for the year – 18.1 3.6 21.7 Disposals – (5.7) – (5.7) Impairment – 4.8 – 4.8 At 31 December 2017 4.8 66.2 10.1 81.1 Risk Management Report Balance sheet amount at 31 December 2017 – 78.7 49.7 128.4 Balance sheet amount at 31 December 2016 – 65.6 15.0 80.6
Within Banking platforms at 31 December 2017 is £38.3 million of expenditure relating to the development of the Group’s digital banking programme. The impairment charge of £4.8 million in the year represents previous software development which has been discontinued in light of a strategic decision to consolidate activities within the digital banking programme. Financial Statements Other Information 234 I Virgin Money Group Annual Report 2017
Notes to the consolidated financial statements
Note 20: Tangible fixed assets
Plant, equipment, fixtures, Land and fittings and buildings vehicles Total £m £m £m Cost: At 1 January 2016 63.3 39.5 102.8 Additions 1.8 6.8 8.6 Disposals (0.6) (3.0) (3.6) At 31 December 2016 64.5 43.3 107.8 Additions – 5.8 5.8 Disposals – (0.1) (0.1) At 31 December 2017 64.5 49.0 113.5 Accumulated depreciation and impairment: At 1 January 2016 9.5 18.7 28.2 Depreciation charge for the year 0.1 5.5 5.6 Disposals (0.5) (2.9) (3.4) At 31 December 2016 9.1 21.3 30.4 Depreciation charge for the year 2.4 6.3 8.7 Disposals – (0.1) (0.1) At 31 December 2017 11.5 27.5 39.0 Balance sheet amount at 31 December 2017 53.0 21.5 74.5 Balance sheet amount at 31 December 2016 55.4 22.0 77.4 Virgin Money Group Annual Report 2017 I 235
Notes to the consolidated financial statements Strategic Report
Note 21: Deferred tax
2017 2016 £m £m Deferred tax assets/(liabilities): Accelerated capital allowances 10.8 12.9 Financial Results Revaluation reserve in respect of available-for-sale financial assets (2.1) (2.6) Cash flow hedge reserve 0.2 5.2 Change in accounting basis on adoption of IFRS (3.2) (4.0) Tax losses carried forward 0.6 7.3 Other temporary differences 5.2 4.2 Total deferred tax assets 11.5 23.0
The Group has not recognised deferred tax assets in respect of gross unused tax losses of £31.2 million (2016: £31.2 million). The movement in the net deferred tax balance is as follows: Governance 2017 2016 £m £m At 1 January 23.0 38.0 Income statement (charge)/credit (refer note 9): Accelerated capital allowances (2.1) (2.2) Tax losses carried forward (6.7) (10.7) Other temporary differences 2.4 (1.5)
(6.4) (14.4) Risk Management Report Amounts (charged)/credited to equity: Available-for-sale financial assets (0.1) (1.7) Cash flow hedges (5.0) 1.4 Adjustments relating to share based payments – (0.3) (5.1) (0.6) At 31 December 11.5 23.0
Note 22: Other assets
2017 2016 Financial Statements £m £m Trade debtors 6.3 17.7 Prepayments and accrued income 40.2 27.9 Other 37.4 76.3 Total other assets 83.9 121.9
Included within ‘Other’ assets are amounts receivable from clearing houses on centrally cleared derivative financial instruments of £8.5 million (2016: £50.7 million) recorded on a net basis. Other Information 236 I Virgin Money Group Annual Report 2017
Notes to the consolidated financial statements
Note 23: Deposits from banks
2017 2016 £m £m Liabilities in respect of securities sold under repurchase agreements 1,130.0 850.0 Secured loans 4,236.0 1,268.0 Other deposits from banks 13.0 14.5 Total deposits from banks 5,379.0 2,132.5
Secured loans relate to the Group’s drawings from the Bank of England’s Term Funding Scheme.
Note 24: Customer deposits
2017 2016 £m £m Savings and investment accounts 30,393.0 27,762.7 Personal current accounts 415.4 343.6 Total customer deposits 30,808.4 28,106.3
Note 25: Debt securities in issue
Securitisation Medium programmes term notes Total £m £m £m At 1 January 2016 1,741.9 297.5 2,039.4 Repayments (798.1) – (798.1) Issues 1,278.9 – 1,278.9 Revaluations 73.0 – 73.0 Other movements (1.5) 8.3 6.8 At 31 December 2016 2,294.2 305.8 2,600.0 Repayments (608.3) – (608.3) Issues 746.2 – 746.2 Revaluations 1.5 – 1.5 Other movements 0.5 (3.0) (2.5) At 31 December 2017 2,434.1 302.8 2,736.9
Other movements comprise amortisation of issuance costs and hedge accounting adjustments.
Securitisation programmes On 25 September 2017, the Group raised £746.2 million from institutional investors through the issuance of Residential Mortgage Backed Securities (RMBS) in the Gosforth Funding 2017-1 transaction in US Dollars and Sterling. In 2016, the Group also raised £1,278.9 million through the issue of RMBS in the Gosforth Funding 2016-1 and Gosforth Funding 2016-2 transactions in Euro, US Dollars and Sterling. For all RMBS funding raised in currencies other than Sterling, the Group enters into cross-currency derivatives which swap the foreign currency liabilities into Sterling.
Medium term notes The Group’s Medium Term Notes have a nominal value of £300 million at a coupon of 2.25% per annum and will be repayable on 21 April 2020. They were issued as part of the Group’s £3 billion Global Medium Term Note programme. Virgin Money Group Annual Report 2017 I 237
Notes to the consolidated financial statements Strategic Report
Note 26: Other liabilities
2017 2016 £m £m Trade creditors and accruals 66.3 59.0 Provisions 7.5 8.5 Financial Results Deferred income 2.3 3.0 Accrued interest 110.9 127.2 Other liabilities 54.5 102.2 Total other liabilities 241.5 299.9
Deferred income represents income advanced from partners that will be recognised in future periods. Accrued interest primarily represents interest which has accrued on savings and investment accounts.
Note 27: Share capital and share premium Governance 2017 2016 £m £m Share capital 0.1 0.1 Share premium 654.5 654.5 Total share capital and share premium 654.6 654.6
Issued and fully paid share capital
2017 2016 Risk Management Report Number 2017 Number 2016 of shares £ of shares £ Ordinary Shares of £0.0001 each At 1 January 444,942,008 44,494 443,711,458 44,371 Issued during year – – 1,230,550 123 At 31 December 444,942,008 44,494 444,942,008 44,494 Deferred Shares of £0.001 each At 1 January and at 31 December 10,052,161 10,052 10,052,161 10,052
As permitted by the Companies Act 2006, the Company’s Articles of Association do not contain any references to authorised share capital. Financial Statements The following describes the rights attaching to each share class at 31 December 2017:
Ordinary Shares The holders of Ordinary Shares are entitled to one vote per share at meetings of the Group. All Ordinary Shares in issue in the Company rank equally and carry the same voting rights and the same rights to receive dividends and other distributions declared or paid by the Company. The shares represented 81.6 per cent of the total share capital at 31 December 2017 (2016: 81.6 per cent). There are no restrictions in the transfer of Ordinary Shares in the Company other than: > certain restrictions which may from time to time be imposed by law and regulations (for example, insider trading laws);
> where Directors and certain employees of the Group require the approval of the Company to deal in the Company’s Ordinary Other Information Shares; and > pursuant to the rules of some of the Group’s employee share plans where certain restrictions may apply while the Ordinary Shares are subject to the plan. 238 I Virgin Money Group Annual Report 2017
Notes to the consolidated financial statements
Note 27: Share capital and share premium (continued)
Deferred Shares As set out in the Articles of Association adopted on listing (and pursuant to the provisions of the Companies Act in respect of shares held in own shares), the Deferred Shares have no voting or dividend rights and, on a return of capital on a winding up, have no valuable economic rights. No application has been made or is currently intended to be made for the Deferred Shares to be admitted to the Official List or to trade on the London Stock Exchange or any other investment exchange. The Deferred Shares are held in treasury. This is to ensure that the aggregate nominal value of the Company’s share capital will be not less than £50,000, which is the minimum level of nominal share capital required by the Companies Act for a company to be established as a public limited company. The shares represented 18.4 per cent of the total share capital at 31 December 2017 (2016: 18.4 per cent).
Note 28: Other equity instruments
2017 2016 £m £m At 1 January 384.1 156.5 Additional Tier 1 securities issued in the year (net of issue costs) – 227.6 At 31 December 384.1 384.1
The Company issued Fixed Rate Resettable Additional Tier > interest on the securities will be due and payable only at the 1 (AT1) securities on the Luxembourg Stock Exchange of sole discretion of the Company, and the Company has sole and £230.0 million on 10 November 2016 and £160.0 million on absolute discretion at all times and for any reason to cancel (in 31 July 2014. The issues are treated as equity instruments in whole or in part) any interest payment that would otherwise be accordance with IAS 32 ‘Financial Instruments: Presentation’ payable on any interest payment date; with the proceeds included in equity, net of transaction costs > the securities are perpetual with no fixed redemption date of £5.9 million. Dividends and other returns to equity holders and are repayable, at the option of the Company, all (but not are treated as a deduction from equity. part) on the first reset date or any reset date thereafter. In The principal terms of the AT1 securities in issue are addition, the AT1 securities are redeemable, at the option of described below: the Company, in whole for certain regulatory or tax reasons. > the securities constitute direct, unsecured and subordinated Any optional redemption requires the prior consent of the obligations of the Company and rank pari passu with holders PRA; and of other Tier 1 instruments and the holders of that class or > all AT1 securities will be converted into Ordinary Shares of the classes of preference shares but rank junior to the claims of Company, at a pre-determined price, should the Common senior creditors; Equity Tier 1 ratio of the Group fall below 7.0% as specified in > the securities bear a fixed rate of interest of 8.750% and the terms. 7.875% from their issue dates up to their first reset dates on 10 November 2021 and 31 July 2019 respectively; Virgin Money Group Annual Report 2017 I 239
Notes to the consolidated financial statements Strategic Report
Note 29: Other reserves
2017 2016 £m £m Revaluation reserve in respect of available-for-sale financial assets At 1 January 4.1 (0.3) Financial Results Net gains from changes in fair value 2.6 52.8 Net gains on disposal transferred to income statement (13.5) (38.3) Amounts transferred to income statement due to hedge accounting 11.5 (8.4) Taxation (0.1) (1.7) At 31 December 4.6 4.1
2017 2016 £m £m Cash flow hedge reserve At 1 January (31.5) (15.3) Governance Amounts recognised in equity (1.2) (36.1) Amounts transferred to income statement 12.6 13.6 Taxation (2.6) 6.3 At 31 December (22.7) (31.5)
Note 30: Retained earnings Risk Management Report 2017 2016 £m £m At 1 January 659.2 544.8 Profit for the year 192.1 140.1 Dividends paid to ordinary shareholders (23.9) (20.8) Distributions to Additional Tier 1 security holders (net of tax) (24.3) (10.1) Purchase of own shares (8.5) (7.3) Share based payments (including deferred tax) 9.9 12.5 Other distributions (0.2) –
As at 31 December 804.3 659.2 Financial Statements
Other distributions represent distributions paid by certain SPVs currently in the process of liquidation.
Employee Benefit Trust (EBT) Retained earnings are stated after deducting £8.0 million (2016: £6.9 million) representing 2,868,458 (2016: 2,922,220) own shares held in an EBT. The Company established an EBT in 2011 in connection with the operation of the Company’s share plans. The Company funded the EBT by means of a cash loan and is therefore considered to be the sponsoring entity. The EBT purchased shares in the Company using the cash loan which is accounted for as a purchase of own shares by the Company. The investment in own shares at 31 December 2017 is £8.0 million (2016: £6.9 million). The market value of the shares held in the EBT at 31 December 2017 was £8.2 million (2016: £8.8 million). Other Information 240 I Virgin Money Group Annual Report 2017
Notes to the consolidated financial statements
Note 31: Contingent liabilities and commitments
Contingent liabilities The Board was not aware of any significant contingent liabilities as at 31 December 2017 (31 December 2016: none). The Company is, from time to time and in the normal course of business, subject to a variety of legal or regulatory claims, actions or proceedings. When such circumstances arise, the Board considers the likelihood of a material outflow of economic resources and provides for its best estimate of costs where an outflow of economic resources is considered probable. While there can be no assurances, the Directors believe, based on information currently available to them, that the likelihood of material outflows from such matters is remote. The Board does not expect the ultimate resolution of any other threatened or actual legal proceedings to have a significant adverse effect on the financial position of the Group.
Loan commitments Contractual amounts to which the Group is committed for extension of credit to customers.
2017 2016 £m £m Not later than 1 year 5,815.9 4,854.3 Later than 1 year and not later than 5 years 97.1 88.2 Later than 5 years 280.5 346.6 Total loan commitments 6,193.5 5,289.1
Operating lease commitments – land and buildings Minimum future lease payments under non-cancellable operating leases:
2017 2016 £m £m Not later than 1 year 7.5 7.1 Later than 1 year and not later than 5 years 26.0 25.0 Later than 5 years 18.7 20.0 Total operating lease commitments – land and buildings 52.2 52.1
Operating lease commitments – other operating leases Minimum future lease payments under non-cancellable operating leases:
2017 2016 £m £m Not later than 1 year 4.6 4.6 Later than 1 year and not later than 5 years – 4.6 Later than 5 years – – Total operating lease commitments – other operating leases 4.6 9.2 Virgin Money Group Annual Report 2017 I 241
Notes to the consolidated financial statements Strategic Report
Note 31: Contingent liabilities and commitments (continued)
Capital commitments Capital commitments for the acquisition of fixed assets:
2017 2016 Financial Results £m £m Not later than 1 year 1.1 1.0 Later than 1 year and not later than 5 years – – Later than 5 years – – Total capital commitments 1.1 1.0
Note 32: Fair value of financial assets and financial liabilities Fair value of financial assets and liabilities recognised at cost The following table summarises the fair values of those financial assets and liabilities not presented on the Group’s balance sheet Governance at their fair value, by the level in the fair value hierarchy into which each fair value measurement is categorised. The accounting policy in note 1.9 (j) sets out the key principles for estimating the fair values of financial instruments.
Total Total fair carrying Level 1 Level 2 Level 3 value value £m £m £m £m £m At 31 December 2017 – 2,579.0 – 2,579.0 2,579.0
Cash and balances at central banks Risk Management Report Loans and advances to banks – 359.4 – 359.4 359.4 Loans and advances to customers – – 36,951.6 36,951.6 36,740.2 Debt securities classified as loans and receivables 0.3 – – 0.3 0.3 Available-for-sale financial assets – – 0.3 0.3 0.3 Other assets – 55.0 – 55.0 55.0 Total financial assets at fair value 0.3 2,993.4 36,951.9 39,945.6 39,734.2 Deposits from banks – 5,379.0 – 5,379.0 5,379.0 Customer deposits – 30,800.5 – 30,800.5 30,808.4 Debt securities in issue 2,748.3 – – 2,748.3 2,736.9 Financial Statements Other liabilities – 215.1 – 215.1 215.1 Total financial liabilities at fair value 2,748.3 36,394.6 – 39,142.9 39,139.4 Other Information 242 I Virgin Money Group Annual Report 2017
Notes to the consolidated financial statements
Note 32: Fair value of financial assets and financial liabilities (continued)
Total Total fair carrying Level 1 Level 2 Level 3 value value £m £m £m £m £m At 31 December 2016 Cash and balances at central banks – 786.3 – 786.3 786.3 Loans and advances to banks – 635.6 – 635.6 635.6 Loans and advances to customers – – 32,514.0 32,514.0 32,367.1 Debt securities classified as loans and receivables 0.7 – – 0.7 0.7 Available-for-sale financial assets – – 0.3 0.3 0.3 Other assets – 68.8 – 68.8 68.8 Total financial assets at fair value 0.7 1,490.7 32,514.3 34,005.7 33,858.8 Deposits from banks – 2,132.5 – 2,132.5 2,132.5 Customer deposits – 28,222.7 – 28,222.7 28,106.3 Debt securities in issue 2,610.8 – – 2,610.8 2,600.0 Other liabilities – 189.5 – 189.5 189.5 Total financial liabilities at fair value 2,610.8 30,544.7 – 33,155.5 33,028.3 Virgin Money Group Annual Report 2017 I 243
Notes to the consolidated financial statements Strategic Report
Note 32: Fair value of financial assets and financial liabilities (continued) Fair value hierarchy majority of these loans were originated means that their The table above summarises the carrying value and fair value fair value can vary significantly from their carrying value. of assets and liabilities held on the balance sheet. There are However, the Group’s policy is to hedge fixed rate loans
three levels to the hierarchy as follows: in respect of interest rate risk, which limits the Group’s Financial Results exposure to this difference in value to be within the Group’s Level 1 – Quoted prices (unadjusted) in active markets for risk appetite. identical assets and liabilities. Loans and advances to customers are categorised as Level 3 Level 2 – Inputs other than quoted prices included within as unobservable pre-payment rates are applied. Level 1 that are observable for the asset or liability, whether directly (i.e. as prices) or indirectly (i.e. derived from prices). Debt securities classified as loans and receivables Fair values are based on quoted prices, where available, or by Level 3 – Inputs for the asset or liability that are not based on discounting cash flows using market rates. observable market data (unobservable inputs). Available-for-sale financial assets Valuation methods for calculations of fair These are unquoted equity securities held by the Group and values of financial assets and liabilities relating to participation in banking and credit card operations. recognised at cost are set out below: They are categorised as Level 3 as the fair value of these Governance Cash and balances at central banks securities cannot be reliably measured, due to the lack of Fair value approximates to carrying value because cash and equivalent instruments with observable prices. balances at central banks have minimal credit losses and are either short-term in nature or reprice frequently. Other assets and liabilities – trade debtors/creditors, accrued income and accrued interest Loans and advances to banks Fair value is deemed to approximate the carrying value. Fair value was estimated by using discounted cash flows applying either market rates where practicable or rates Deposits from banks and customer deposits offered by other financial institutions for loans with similar Fair values of deposit liabilities repayable on demand or characteristics. The fair value of floating rate placements, with variable interest rates are considered to approximate Risk Management Report fixed rate placements with less than six months to maturity to carrying value. The fair value of fixed interest deposits and overnight deposits is considered to approximate to their with less than six months to maturity is their carrying carrying amount. amount. The fair value of all other deposit liabilities was estimated by discounting cash flows, using market rates or Loans and advances to customers rates currently offered by the Group for deposits of similar The Group provides loans of varying rates and maturities remaining maturities. to customers. The fair value of loans with variable interest rates is considered to approximate to carrying value as the Debt securities in issue interest rate can be moved in line with market conditions. For Fair values are based on quoted prices where available or by loans with fixed interest rates, fair value was estimated by discounting cash flows using market rates. discounting cash flows using market rates or rates normally
offered by the Group. The change in interest rates since the Financial Statements Other Information 244 I Virgin Money Group Annual Report 2017
Notes to the consolidated financial statements
Note 32: Fair value of financial assets and financial liabilities (continued)
Fair value of financial assets and liabilities recognised at fair value The following table summarises the fair values of those financial assets and liabilities recognised at fair value, by the level in the fair value hierarchy into which each fair value measurement is categorised. The accounting policy in note 1.9(j) sets out the key principles for estimating the fair values of financial instruments.
Level 1 Level 2 Level 3 Total 2017 £m £m £m £m Financial assets Derivative financial instruments – 78.8 – 78.8 Available-for-sale financial assets 1,048.7 – 2.8 1,051.5 Financial liabilities Derivative financial instruments – 93.5 – 93.5
Level 1 Level 2 Level 3 Total 2016 £m £m £m £m Financial assets Derivative financial instruments – 104.2 – 104.2 Available-for-sale financial assets 850.9 – 7.6 858.5 Financial liabilities Derivative financial instruments – 229.7 – 229.7
Level 1 Valuations The fair value of debt securities categorised as available-for-sale financial assets is derived from unadjusted quoted prices in an active market. Level 2 Valuations The fair values of derivative instruments are calculated by discounted cash flow models using yield curves that are based on observable market data or are based on valuations obtained from counterparties. Level 3 Valuations Level 3 available-for-sale financial assets represent the Group’s best estimates of the value of certain equity investments in unlisted companies and of unlisted preferred stock. The valuations take into account relevant information on the individual investments, with discounts applied to reflect their illiquid nature and, in respect of the preferred stock, risks of reduction in conversion rights. The discounts applied are the most significant unobservable valuation inputs. The Group’s shares in VocaLink Holdings Limited (Vocalink) were included within this category at 31 December 2016. The shares were sold in April 2017 following regulatory approval of Mastercard’s acquisition of Vocalink, resulting in recognition of a gain on disposal of £6.1 million, included within other operating income. Virgin Money Group Annual Report 2017 I 245
Notes to the consolidated financial statements Strategic Report
Note 33: Offsetting of financial assets and financial liabilities
Related amounts where set off in the balance sheet not permitted2
Gross Amounts Net amounts Subject Financial Results amounts of offset in presented in to master Collateral assets and the balance the balance netting received/ liabilities sheet¹ sheet agreements pledged Net amounts £m £m £m £m £m £m As at 31 December 2017 Financial assets Derivative financial instruments 129.8 (51.0) 78.8 (11.5) (67.3) – Loans and advances to banks 359.4 – 359.4 – (74.6) 284.8 Financial liabilities Deposits from banks 5,379.0 – 5,379.0 – (8.4) 5,370.6
Derivative financial instruments 107.7 (14.2) 93.5 (11.5) (63.6) 18.4 Governance Other liabilities 251.9 (36.8) 215.1 – – 215.1
Related amounts where set off in the balance sheet not permitted2 Gross Amounts Net amounts Subject amounts of offset in presented in to master Collateral assets and the balance the balance netting received/ liabilities sheet¹ sheet agreements pledged Net amounts Risk Management Report £m £m £m £m £m £m As at 31 December 2016 Financial assets Derivative financial instruments 123.9 (19.7) 104.2 (25.4) (78.8) – Loans and advances to banks 635.6 – 635.6 – (168.1) 467.5 Other assets 72.0 (3.2) 68.8 – – 68.8 Financial liabilities Deposits from banks 2,132.5 – 2,132.5 – (10.7) 2,121.8 Derivative financial instruments 254.1 (24.4) 229.7 (25.4) (168.1) 36.2 Financial Statements Other liabilities 188.0 1.5 189.5 – – 189.5
1 The amounts set off in the balance sheet as shown above represent derivatives and variation margin cash collateral with central clearing houses which meet the criteria for offsetting under IAS 32. 2 The Group enters into derivatives with various counterparties which are governed by industry standard master netting agreements. The Group holds and provides cash and securities collateral in respect of derivative transactions covered by these agreements. The right to set off balances under these master netting agreements or to set off cash and securities collateral only arises in the event of non-payment or default and, as a result, these arrangements do not qualify for offsetting under IAS 32. The effects of over collateralisation have not been taken into account in the above table. Other Information 246 I Virgin Money Group Annual Report 2017
Notes to the consolidated financial statements
Note 34: Cash flow statements
(a) Change in operating assets 2017 2016 £m £m Change in loans and advances to customers (4,417.3) (5,295.7) Change in derivative financial assets 25.4 (21.9) Change in other operating assets 34.1 (69.7) Change in operating assets (4,357.8) (5,387.3)
(b) Change in operating liabilities 2017 2016 £m £m Change in deposits from banks 3,247.1 833.2 Change in customer deposits 2,702.1 2,961.4 Change in derivative financial liabilities (136.2) 73.7 Change in other operating liabilities (6.4) 89.0 Change in operating liabilities 5,806.6 3,957.3
(c) Non-cash and other items 2017 2016 £m £m Depreciation, amortisation and impairment 35.2 21.0 Other non-cash items 13.0 39.3 Total non-cash and other items 48.2 60.3
(d) Analysis of cash and cash equivalents as shown in the balance sheet 2017 2016 £m £m
Cash and balances at central banks 2,579.0 786.3 Less: mandatory reserve deposits1 (53.0) (49.1) 2,526.0 737.2 Loans and advances to banks 359.4 635.6 Available-for-sale financial assets (with a maturity of less than 3 months) 149.4 – Deposits from banks (5,379.0) (2,132.5) Less: amounts not repayable on demand 5,379.0 2,131.9 – (0.6) Total cash and cash equivalents 3,034.8 1,372.2
1 Mandatory reserves with central banks are not available for use in day-to-day operations. Virgin Money Group Annual Report 2017 I 247
Notes to the consolidated financial statements Strategic Report
Note 35: Related party transactions Key Management Personnel Key Management Personnel refer to the Executive Committee of the Group, Non-Executive Directors and Directors of subsidiary companies. Financial Results 2017 2016 £m £m Compensation Salaries and other short-term benefits 6.7 7.4 Share based payments (refer note 7) 6.1 7.6 Post-employment benefits 0.9 0.8 Total compensation 13.7 15.8
Aggregate contributions in respect of Key Management Personnel to defined contribution pension schemes £0.9 million (2016: £0.8 million).
2017 2016 Governance £m £m Deposits At 1 January 1.4 2.2 Placed (includes deposits of appointed Key Management Personnel) 0.6 1.5 Withdrawn (includes deposits of former Key Management Personnel) (0.9) (2.3) Deposits outstanding at 31 December 1.1 1.4
Deposits placed by Key Management Personnel attracted interest rates of up to 3.0% (2016: 3.0%). At 31 December 2017, the Risk Management Report Group did not provide any guarantees in respect of Key Management Personnel (2016: none). At 31 December 2017, transactions, arrangements and agreements entered into by the Group’s banking subsidiaries with Key Management Personnel included amounts outstanding in respect of loans and credit card transactions of £0.6 million with 7 Key Management Personnel (2016: £0.9 million with 7 Key Management Personnel).
Subsidiaries Transactions and balances with subsidiaries have been eliminated on consolidation. A full list of the Company’s subsidiaries and SPVs included within the consolidation is provided in note 2 to the parent company financial statements.
Other transactions Financial Statements Transaction value at year end: 2017 2016 £m £m Trademark licence fees paid to Virgin Enterprises Limited (8.0) (7.0) Commissions received and charges paid to Virgin Atlantic Airways Limited 0.5 0.4 Donations to The Virgin Money Foundation (1.4) (1.4) Dividend payment to Virgin Group Holdings Limited (8.4) (7.3) Other costs paid to Virgin Management Group Companies (0.3) (0.3)
Balance outstanding at year end: 2017 2016 £m £m
Trademark licence fees to Virgin Enterprises Limited (0.6) (0.6) Other Information Commissions received and charges paid to Virgin Atlantic Airways Limited 0.1 0.1 Asset recognised in relation to Virgin Atlantic Airways Limited agreement 10.0 – Liability recognised in relation to Virgin Atlantic Airways Limited agreement (10.0) – Donations to The Virgin Money Foundation – (0.2) Other costs to Virgin Management Group Companies – (0.1) 248 I Virgin Money Group Annual Report 2017
Notes to the consolidated financial statements
Note 35: Related party transactions (continued) Trademark licence fees paid to Virgin of support services to the Foundation on a pro bono basis, Enterprises Limited including use of facilities and employee time. The estimated Licence fees are payable to Virgin Enterprises Limited for the gift in kind for support services provided during the year was use of the Virgin Money brand trademark. £0.4 million (2016: £0.3 million). Virgin Atlantic Airways Limited Dividend payment to Virgin Group Holdings The Group receives credit card commissions and incurs air Limited mile charges to Virgin Atlantic Airways Limited (VAA) in The Group made dividend payments totalling £8.4 million to respect of an agreement between the two parties. Virgin Group Holdings Limited in the year which represented that company’s proportionate share of the total final 2016 In June 2017 an agreement was signed with VAA which will dividend and the total interim 2017 dividend. In the prior year, give rise to related party transactions in future periods. An the Group made dividend payments totalling £7.3 million asset and liability has been recognised during the year in to Virgin Group Holdings Limited, which represented that relation to a committed payment under this agreement. company’s proportionate share of the total final 2015 dividend Donations to The Virgin Money Foundation and the total interim 2016 dividend. (the Foundation) Other costs paid to Virgin Management The Group has made donations to the Foundation in both the current and prior year to enable the Foundation to pursue its Group Companies These costs include transactions with other companies in charitable objectives. The Group has also provided a number the Virgin Group.
Note 36: Events after balance sheet date There have been no significant events between 31 December 2017 and the date of approval of the financial statements which would require a change or additional disclosure in the financial statements.
Note 37: Future accounting developments A number of new accounting standards and amendments to is based on the objectives of the entity’s business model for accounting standards have been issued by the IASB, however managing its financial assets and the contractual cash flow are not yet effective and have not been early adopted by characteristics of the instruments. IFRS 9 retains most of the the Group. Those which may be relevant to the Group are existing classification requirements for financial liabilities. set out below. In relation to Classification and Measurement, IFRS 9 will not (a) IFRS 9 ‘Financial instruments’ result in a significant change to current asset and liability (Effective 1 January 2018, EU endorsed on measurement bases. The Group’s debt security investment 22 November 2016) portfolio, which is classified as Available-for-Sale under Background IAS 39, will be reclassified into the FVOCI category on In July 2014, the IASB issued the final version of IFRS 9 1 January 2018, with no change in measurement basis and ‘Financial Instruments’ which replaces IAS 39 ‘Financial no impact to the Group’s financial position. The Group’s Instruments: Recognition and Measurement’. This new small number of equity investments, which are classified as accounting standard is effective from 1 January 2018 and has Available-for-Sale under IAS 39, will be reclassified to either three core areas of change: Classification and Measurement; FVOCI or FVTPL on a case by case basis, with no change in Hedge Accounting; and Impairment. The most significant measurement basis. impacts on the Group are from the changes to impairment. Hedge Accounting Classification and Measurement The hedge accounting requirements of IFRS 9 are more closely The Classification and Measurement requirements of IFRS 9 aligned with risk management practices and follow a more require financial assets to be classified into one of three principle-based approach. IFRS 9 includes an accounting measurement categories, fair value through profit or loss policy choice to maintain existing IAS 39 hedge accounting (FVTPL), fair value through other comprehensive income rules until the IASB completes its project on macro hedging. (FVOCI) and amortised cost. For financial assets classification The Group has decided to apply this accounting policy choice and will continue applying IAS 39 hedge accounting. Virgin Money Group Annual Report 2017 I 249
Notes to the consolidated financial statements Strategic Report
Note 37: Future accounting developments (continued) Impairment (Expected Credit Loss) > Qualitative measures include the observation of specific The impairment requirements of IFRS 9 replaces the existing events such as short-term forbearance, payment cancellation, ‘incurred loss’ impairment approach with an expected credit historical arrears or extension to customer terms. loss approach, resulting in earlier recognition of credit losses. > IFRS 9 includes a rebuttable presumption that 30 days past Financial Results The IFRS 9 impairment model has three stages. Entities are due is an indicator of a significant increase in credit risk. required to recognise a 12 month expected loss allowance The Group considers 30 days past due to be an appropriate on initial recognition (stage 1) and a lifetime expected loss backstop measure and will not rebut this presumption. allowance when there has been a significant increase in credit risk (stage 2). Definition of default (movement to stage 3) The Group has identified a series of quantitative and Stage 3 requires objective evidence that an asset is credit- qualitative criteria that will be used to determine if an impaired, which is similar to the guidance on incurred losses account meets the definition of default, and therefore should in IAS 39. Loan commitments and financial guarantees not move to stage 3: measured at fair value through profit or loss are also in scope for impairment. The assessment of whether a significant > IFRS 9 includes a rebuttable presumption that 90 days past increase in credit risk has occurred is a key aspect of the due is an indicator of default. The Group considers 90 days IFRS 9 methodology. It involves quantitative and qualitative past due to be an appropriate measure of default and will not Governance measures and therefore requires considerable management rebut this presumption. judgement. In addition IFRS 9 also requires the use of more > Qualitative measures include the observation of specific forward-looking information including reasonable and events such as insolvency or enforcement activity. supportable forecasts of future economic conditions. Forward-looking information and multiple economic Key accounting judgements scenarios The Group undertook a full technical assessment of IFRS 9 The assessment of significant increase in credit risk and the which highlighted certain significant accounting policies and calculation of expected credit loss both incorporate forward- judgements. These areas include the selection of quantitative looking information. The Group has identified the most Risk Management Report and qualitative criteria for the determination of significant significant macroeconomic factors including house price increase in credit risk and the application of forward-looking inflation, unemployment rate and Bank Base Rate. These data into the expected credit loss calculations, including variables and their associated impact on PD, EAD and LGD multiple economic scenarios. The following summarises have been factored into the credit loss models. the key accounting judgements the Group will apply on The Group has determined an approach to the selection and adoption of IFRS 9: application of multiple scenarios. The Group does not have Measurement of Expected Credit Loss an in-house economics function and will therefore source Expected credit loss is measured on either a 12 month or economic scenarios from a third party source to form the lifetime basis depending on whether a significant increase in basis of the economic scenarios used. The Group will consider credit risk has occurred since initial recognition or whether a minimum of three scenarios on a probability-weighted the asset meets the definition of default. Expected credit loss approach. These scenarios include a base, an upside and a Financial Statements is the product of the probability of default (PD), exposure at downside scenario. default (EAD) and loss given default (LGD), discounted at the IFRS 9 implementation programme and governance effective interest rate. The Group has managed the transition to IFRS 9 through Significant Increase in Credit Risk (movement from stage 1 an IFRS 9 delivery programme to ensure a high-quality to stage 2) implementation in compliance with the accounting and The Group has identified a series of quantitative, qualitative regulatory guidance. The Audit Committee has had oversight and backstop criteria that will be used to determine if an responsibility for the implementation of IFRS 9. account has demonstrated a significant increase in credit risk, The Group has developed and built new expected credit loss and therefore should move from stage 1 to stage 2: models for the key retail portfolios (secured and unsecured). > Quantitative measures consider the increase in an accounts The Group has run these models during the second half of
remaining lifetime PD compared to the expected residual 2017 in a period of parallel run to ensure full readiness in Other Information lifetime PD when the account was originated. The Group advance of implementation from 1 January 2018. The Group will segment its credit portfolios into PD bands and has is in the process of completing the refinement and validation determined a relevant threshold for each PD band, where of these models. The Group’s auditors have undertaken a movement in excess of threshold is considered to be extensive audit procedures during the course of 2017 to significant. These thresholds have been determined separately provide proactive assurance over the new expected credit loss for each portfolio based on historical evidence of delinquency. models and the Group’s IFRS 9 accounting policies. 250 I Virgin Money Group Annual Report 2017
Notes to the consolidated financial statements
Note 37: Future accounting developments (continued) The Group continues to monitor the wider market (b) IFRS 15 ‘Revenue from Contracts with developments in relation to IFRS 9, including evolving Customers’ (Effective 1 January 2018, EU disclosure requirements and regulatory developments such as endorsed on 22 September 2016) potential capital transitionary rules. IFRS 15 replaces IAS 18 ‘Revenue’ and IAS 11 ‘Construction Impact of transition to IFRS 9 contracts’ as a comprehensive standard to address The Group will record an adjustment to its opening current inconsistencies in accounting practice for revenue 1 January 2018 retained earnings to reflect the application recognition. Financial instruments and other contractual of the new requirements of IFRS 9 and will not restate rights or obligations within the scope of IFRS 9 are excluded comparative periods. from the scope of this standard. The Group estimates the transition to IFRS 9 will reduce The Group has reviewed the requirements of the new standard shareholders’ equity by approximately £35 million after and it is not expected to have a significant impact, as a deferred tax as at 1 January 2018. The impact on the substantial proportion of the Group’s income is generated Group’s CET1 ratio will reflect the recently published capital from financial instruments. transitional arrangements. This adjustment arises from the (c) IFRS 16 ‘Leases’ (Effective 1 January increase in the Group’s balance sheet loan loss allowances 2019, EU endorsed on 31 October 2017) as a result of the application of IFRS 9 requirements, with This standard replaces IAS 17 ‘Leases’ and will result in most the Group’s retail credit card portfolio being the most leases for lessees being brought on to the Balance Sheet significantly impacted. under a single lease model, removing the distinction between The Group continues to refine, monitor and validate certain finance and operating leases. It requires a lessee to recognise elements of the impairment models and related controls a ‘right-of-use’ asset and a lease liability. Lessor accounting ahead of full reporting of IFRS 9 impacts later in 2018. remains largely unchanged. This will mainly impact properties the Group currently accounts for as operating leases. A project is in place and the Group is currently undertaking a review of its lease agreements. No decisions have been made yet in relation to transition options. Note 38: Country by country reporting The Capital Requirements (Country by Country Reporting) Regulations came into effect on 1 January 2014 and place certain reporting obligations on financial institutions within CRD IV. The activities of the Group are described in the Strategic Report. All companies consolidated within the Group’s financial statements are UK registered entities.
UK Number of employees (average FTE) 2,959 Turnover (total income) £662.7m Pre-tax profit £262.6m Corporation tax paid £45.1m Public subsidies received £0.0m The Group received no public subsidies during the year. Virgin Money Group Annual Report 2017 I 251
Parent Company balance sheet Strategic Report
For the year ended 31 December
2017 2016 Notes £ million £ million Assets Loans and advances to banks 23.0 41.0 Derivative financial instruments 1.4 4.6 Financial Results Investment in related undertakings 2 1,380.3 1,370.4 Deferred tax assets 3 0.1 0.1 Other assets 4 3.7 17.0 Total assets 1,408.5 1,433.1 Equity and liabilities Liabilities Deposits from banks 1.3 2.5 Derivative financial instruments – 4.3 Other liabilities 5 104.2 86.2
Total liabilities 105.5 93.0 Governance Equity Share capital and share premium 6 654.6 654.6 Other equity instruments 6 384.1 384.1 Retained earnings1 7 264.3 301.4 Total equity 1,303.0 1,340.1 Total equity and liabilities 1,408.5 1,433.1
1 The Company profit for the year was £11.3 million (2016: £56.3 million) Risk Management Report The accompanying notes are an integral part of the parent company financial statements. The financial statements on pages 251 to 260 were approved and authorised for issue by the Board and were signed on its behalf on 26 February 2018.
Glen Moreno Jayne-Anne Gadhia CBE Financial Statements Chair Chief Executive Other Information 252 I Virgin Money Group Annual Report 2017
Parent Company statement of changes in equity
For the year ended 31 December
Share capital and share Other equity Retained Total premium instruments earnings equity £ million £ million £ million £ million Balance as at 1 January 2017 654.6 384.1 301.4 1,340.1 Profit for the year – – 11.3 11.3 Total comprehensive income for the year – – 11.3 11.3 Transactions with equity holders Capital contribution – share based payments – – 9.9 9.9 Purchase of own shares – – (8.5) (8.5) Issue of Additional Tier 1 securities (net of issue costs) – – – – Distribution to Additional Tier 1 noteholders – – (32.7) (32.7) Tax attributable to Tier 1 securities – – 6.8 6.8 Dividends paid to ordinary shareholders – – (23.9) (23.9) Balance as at 31 December 2017 654.6 384.1 264.3 1,303.0
Balance as at 1 January 2016 654.6 156.5 270.5 1,081.6 Profit for the year – – 56.3 56.3 Total comprehensive income for the year – – 56.3 56.3 Transactions with equity holders Capital contribution – share based payments – – 12.8 12.8 Purchase of own shares – – (7.3) (7.3) Issue of Additional Tier 1 securities (net of issue costs) – 227.6 – 227.6 Distribution to Additional Tier 1 noteholders – – (12.6) (12.6) Tax attributable to Tier 1 securities – – 2.5 2.5 Dividends paid to ordinary shareholders – – (20.8) (20.8) Balance as at 31 December 2016 654.6 384.1 301.4 1,340.1
The accompanying notes are an integral part of the parent company financial statements. Virgin Money Group Annual Report 2017 I 253
Parent Company cash flow statement Strategic Report
For the year ended 31 December
2017 2016 Notes £ million £ million Profit before taxation 14.0 55.5 Adjustments for: Change in operating assets 10(a) 2.8 (2.8) Financial Results Change in operating liabilities 10(b) (2.3) 6.8 Non-cash and other items 10(c) 9.4 (58.7) Movement in amounts from group undertakings (1.1) (0.9) Net cash provided by/(used in) operating activities 22.8 (0.1) Net cash outflow from investing activities Increase in investment in subsidiary undertaking (21.0) – Investment in Additional Tier 1 instruments issued by subsidiary undertaking (2.3) (227.7) Net cash used in investing activities (23.3) (227.7) Net cash (outflow)/inflow from financing activities
Issue of Additional Tier 1 securities (net of issue costs) – 227.6 Governance Distribution to Additional Tier 1 security holders (32.7) (12.6) Purchase of own shares (8.5) (7.3) Repayments of amounts due to group undertakings (17.0) (25.0) Borrowings drawn from group undertakings 64.6 3.9 Dividends paid on ordinary shares (23.9) (20.8) Net cash (used in)/provided by financing activities (17.5) 165.8
Change in cash and cash equivalents (18.0) (62.0) Risk Management Report Cash and cash equivalents at beginning of year 41.0 103.0 Cash and cash equivalents at end of year 10(d) 23.0 41.0
The accompanying notes are an integral part of the parent company financial statements.
Financial Statements Other Information 254 I Virgin Money Group Annual Report 2017
Notes to the Parent Company financial statements
Note 1: Basis of preparation
1.1 Basis of preparation and accounting policies The financial statements of Virgin Money Holdings (UK) Estimates and underlying assumptions are reviewed on plc, (the Parent Company, the Company), which should be an ongoing basis. Revisions to accounting estimates are read in conjunction with the Group Directors’ Report, have recognised in the period in which the estimates are revised been prepared on a going concern basis in accordance and in any future periods affected. with International Financial Reporting Standards (IFRS) as 1.3 Accounting policies adopted by the EU including interpretations issued by the The accounting policies of the Company are the same as those IFRS Interpretations Committee and with those parts of the of the Group which are set out in note 1 of the consolidated Companies Act 2006 applicable to companies reporting under financial statements except that the Company has no policy IFRS. No individual statement of comprehensive income is in respect of consolidation and the Group has no policy in presented for the Company, as permitted by Section 408 of respect of investments in related undertakings. the Companies Act 2006. Investments in related undertakings are recognised at 1.2 Basis of measurement historical cost, less any provision for impairment. They are The financial statements have been prepared under the reviewed annually for impairment, or more frequently when historical cost convention as modified by the revaluation of there are indications that the investment may be impaired. derivative financial instruments. An impairment loss is recognised for the amount by which the The preparation of the financial statements in conformity with carrying amount of the investment exceeds its recoverable IFRS requires Management to make judgements, estimates amount, which is defined as the higher of its fair value less and assumptions that affect the application of accounting costs of disposal or its value in use. policies and the reported amounts of assets, liabilities, income These accounting policies have been applied consistently to all and expenses. Actual results may differ from these estimates. years presented in these financial statements.
Note 2: Investment in related undertakings
2017 2016 £m £m At 1 January 1,370.4 1,127.6 Increase in investment in subsidiary undertaking 21.0 – Decrease in investment in subsidiary undertaking (21.0) – Capital contribution – share based payments 9.9 12.8 Investment in Additional Tier 1 instruments issued by subsidiary undertaking – 230.0 At 31 December 1,380.3 1,370.4
Change in investment in subsidiary undertakings The transfer of stocks and shares ISA contracts from Virgin Money Personal Financial Service Limited (VMPFS) to Virgin Money Unit Trust Managers Limited (VMUTM) was completed in March 2017, following approval by the Directors of those companies. Subsequent to the transfer, all new stocks and shares ISA sales are written by VMUTM. The transfer was funded through a new share issuance made by VMUTM to the Company, resulting in an increase in the investment held in VMUTM, with a related decrease in the investment held in VMPFS.
The decrease in the investment held in VMPFS of £21.0 million was determined based on a value-in-use calculation, using cash flow projections based on financial budgets approved by the Board covering a three year period, applying a discount rate of 11%. Virgin Money Group Annual Report 2017 I 255
Notes to the Parent Company financial statements Strategic Report
Note 2: Investment in related undertakings (continued)
Related undertakings The following entities were related undertakings of the Company during the year, including SPVs controlled by the Company in accordance with note 1.5 to the consolidated financial statements: Financial Results
Name Class of Share Holding Subsidiary undertakings Direct holdings Virgin Money plc¹ Ordinary 100% Virgin Money Personal Financial Service Limited¹ Ordinary 100% Virgin Money Unit Trust Managers Limited¹ Ordinary 100% Virgin Money Management Services Limited1 Ordinary 100% Virgin Money Giving Limited1 Ordinary 100% Governance Indirect holdings Eagle Place Covered Bonds LLP1,2 N/A N/A 3 Virgin Money Nominees Limited1,2 Ordinary 100% Northern Rock Limited1,2 Ordinary 100%
Associated undertaking The Virgin Money Foundation¹ N/A N/A 3 Risk Management Report Financial Statements Other Information 256 I Virgin Money Group Annual Report 2017
Notes to the Parent Company financial statements
Note 2: Investment in related undertakings (continued)
Name Class of Share Holding Special purpose vehicles Nature of business Gosforth Funding 2011-1 plc4 Issue of securitised notes Gosforth Funding 2012-1 plc4 Issue of securitised notes Gosforth Funding 2012-2 plc4 Issue of securitised notes Gosforth Funding 2014-1 plc5 Issue of securitised notes Gosforth Funding 2015-1 plc5 Issue of securitised notes Gosforth Funding 2016-1 plc5 Issue of securitised notes Gosforth Funding 2016-2 plc5 Issue of securitised notes Gosforth Funding 2017-1 plc5 Issue of securitised notes Gosforth Mortgages Trustee 2011-1 Limited4 Trust Gosforth Mortgages Trustee 2012-1 Limited4 Trust Gosforth Mortgages Trustee 2012-2 Limited4 Trust Gosforth Mortgages Trustee 2014-1 Limited5 Trust Gosforth Mortgages Trustee 2015-1 Limited5 Trust Gosforth Mortgages Trustee 2016-1 Limited5 Trust Gosforth Mortgages Trustee 2016-2 Limited5 Trust Gosforth Mortgages Trustee 2017-1 Limited5 Trust Gosforth Holdings 2011-1 Limited4 Holding company Gosforth Holdings 2012-1 Limited4 Holding company Gosforth Holdings 2012-2 Limited4 Holding company Gosforth Holdings 2014-1 Limited5 Holding company Gosforth Holdings 2015-1 Limited5 Holding company Gosforth Holdings 2016-1 Limited5 Holding company Gosforth Holdings 2016-2 Limited5 Holding company Gosforth Holdings 2017-1 Limited5 Holding company
1 Registered office: Jubilee House, Gosforth, Newcastle upon Tyne, NE3 4PL. 2 Dormant companies. 3 The entity does not have share capital. 4 These companies are in the process of liquidation and their registered office is C/O KPMG LLP, 8 Princes Parade, Liverpool, L3 1QH. 5 Registered office: Fifth Floor, 100 Wood Street, London, EC2V 7EX. Note 3: Deferred tax The Company has not recognised deferred tax assets in respect of gross unused tax losses of £31.1 million (2016: £31.1 million).
Note 4: Other assets
2017 2016 £m £m Amounts owed from subsidiary undertakings – 13.7 Group relief owed from related parties 3.7 3.3 Total 3.7 17.0
Amounts owed from subsidiary undertakings of £8.2 million were waived during the year as a result of a simplification of the Group’s intercompany structure. A further amount of £6.6 million was waived in January 2018 and so was provided for at the balance sheet date. Virgin Money Group Annual Report 2017 I 257
Notes to the Parent Company financial statements Strategic Report
Note 5: Other liabilities
2017 2016 £m £m Other creditors 3.4 –
Trading amounts owed to subsidiary undertakings 0.6 3.1 Financial Results Loan amounts owed to subsidiary undertakings 100.2 83.1 Total 104.2 86.2
Loan amounts owed to subsidiary undertakings is analysed further below:
2017 2016 £m £m At 1 January 83.1 163.9 Repayments (17.0) (25.0) Borrowings drawn 64.6 3.9
Amounts offset against dividends received from subsidiary undertakings (30.5) (59.7) Governance Total 100.2 83.1
Note 6: Share capital, share premium and other equity instruments Details of the Company’s share capital, share premium and other equity instruments are given in notes 27 and 28 of the consolidated financial statements.
Note 7: Retained earnings Risk Management Report
Investment Subsidiary in own Retained contribution shares profits Total £m £m £m £m At 1 January 2016 38.5 (2.9) 234.9 270.5 Profit for the year – – 56.3 56.3 Dividends paid to ordinary shareholders – – (20.8) (20.8) Distributions to Additional Tier 1 security holders (net of tax) – – (10.1) (10.1) Purchase of own shares – (7.3) – (7.3) Award of shares from own shares – 3.3 (3.3) – Financial Statements Capital contribution – share based payments 12.8 – – 12.8 As at 31 December 2016 51.3 (6.9) 257.0 301.4 Profit for the year – – 11.3 11.3 Dividends paid to ordinary shareholders – – (23.9) (23.9) Distributions to Additional Tier 1 security holders (net of tax) – – (25.9) (25.9) Purchase of own shares – (8.5) – (8.5) Award of shares from own shares – 7.4 (7.4) – Capital contribution – share based payments 9.9 – – 9.9 As at 31 December 2017 61.2 (8.0) 211.1 264.3 Other Information 258 I Virgin Money Group Annual Report 2017
Notes to the Parent Company financial statements
Note 8: Analysis of financial assets and financial liabilities by measurement basis
Financial liabilities Loans and Derivatives not in at amortised cost receivables IAS 39 hedges Total 2017 £m £m £m £m Financial assets Loans and advances to banks – 23.0 – 23.0 Derivative financial instruments – – 1.4 1.4 Amounts owed from subsidiary undertakings – – – – Total financial assets – 23.0 1.4 24.4 Non financial assets 1,384.1 Total assets 1,408.5 Financial liabilities Deposits from banks 1.3 – – 1.3 Derivative financial instruments – – – – Amounts owed to subsidiary undertakings 100.8 – – 100.8 Total financial liabilities 102.1 – – 102.1 Non financial liabilities 3.4 Total liabilities 105.5 Equity 1,303.0 Total liabilities and equity 1,408.5
Financial liabilities Loans and Derivatives not in at amortised cost receivables IAS 39 hedges Total 2016 £m £m £m £m Financial assets Loans and advances to banks – 41.0 – 41.0 Derivative financial instruments – – 4.6 4.6 Amounts owed from subsidiary undertakings – 13.7 – 13.7 Total financial assets – 54.7 4.6 59.3 Non financial assets 1,373.8 Total assets 1,433.1 Financial liabilities Deposits from banks 2.5 – – 2.5 Derivative financial instruments – – 4.3 4.3 Amounts owed to subsidiary undertakings 86.2 – – 86.2 Total financial liabilities 88.7 – 4.3 93.0 Total liabilities 93.0 Equity 1,340.1 Total liabilities and equity 1,433.1 Virgin Money Group Annual Report 2017 I 259
Notes to the Parent Company financial statements Strategic Report
Note 9: Fair value of financial assets and financial liabilities
2017 2016 Total Total Total carrying Total carrying
Level 1 Level 2 Level 3 fair value value fair value value Financial Results £m £m £m £m £m £m £m Financial assets Loans and advances to banks – 23.0 – 23.0 23.0 41.0 41.0 Amounts owed from – – – – – 13.7 13.7 subsidiary undertakings Financial liabilities Amounts owed to subsidiary – 100.8 – 100.8 100.8 86.2 86.2 undertakings Deposits from banks – 1.3 – 1.3 1.3 2.5 2.5
The Company has £1.4 million (2016: £0.3 million) of net derivative financial instruments classified as level 2 in the fair Governance value hierarchy.
Note 10: Cash flow statements
(a) Change in operating assets 2017 2016 £m £m
Change in derivative financial assets 3.2 (3.1) Risk Management Report Change in other operating assets (0.4) 0.3 Change in operating assets 2.8 (2.8)
(b) Change in operating liabilities 2017 2016 £m £m Change in derivative financial liabilities (4.3) 3.6 Change in other operating liabilities 2.0 3.2 Change in operating liabilities (2.3) 6.8 Financial Statements (c) Non-cash and other items 2017 2016 £m £m Amounts offset against dividends received from subsidiary undertakings (30.5) (59.7) Other non-cash items 28.8 16.1 Non-cash movement in investments 11.1 (15.1) Total non-cash and other items 9.4 (58.7)
(d) Analysis of cash and cash equivalents as shown in the balance sheet Other Information Cash and cash equivalents consists of loans and advances to banks of £23.0 million at 31 December 2017 (31 December 2016: £41.0 million). 260 I Virgin Money Group Annual Report 2017
Notes to the Parent Company financial statements
Note 11: Related party transactions
Key Management Personnel The Key Management personnel of the Company are Key Management personnel of the Group, with relevant disclosures given in note 35 to the consolidated financial statements. The Company has no employees (2016: nil). As discussed in note 7 of the consolidated financial statements, the Group provides share based compensation to employees of subsidiary undertakings through a number of schemes. These awards are all in relation to shares in the Company and the cost of providing those benefits is not recharged to the subsidiary undertaking, therefore is recognised as a capital contribution.
Other transactions Transaction value Balance outstanding Year ended 31 December at 31 December 2017 2016 2017 2016 £m £m £m £m Recharges and trading balances owed (to)/from subsidiaries (0.7) (0.7) 3.1 0.3 Net loans owed (to)/from subsidiaries (16.4) (2.2) (100.2) (69.5) Dividend payment to Virgin Group Holdings Limited (8.4) (7.3) – –
Amounts owed from subsidiary undertakings of £8.2 million were waived during the year as a result of a simplification of the Group’s intercompany structure. A further amount of £6.6 million was waived in January 2018 and so was provided for at the balance sheet date. Virgin Money Group Annual Report 2017 I 261 Strategic Report Other information
262 Alternative performance measures 263 Glossary Financial Results 266 Abbreviations 267 Shareholder information Governance Risk Management Report Financial Statements Other Information
Virgin Money Lounge, Manchester 262 I Virgin Money Group Annual Report 2017
Alternative Performance Measures
The Group analyses its performance on an underlying basis, as described in the basis of preparation of the financial results on page 48, and reconciled to the statutory results in note 2 to the consolidated financial statements. These are consistent with the Board and the Executive’s view of the Group’s underlying performance without the distortions of items and timing differences which are not reflective of the Group’s ongoing business activities. The Group also calculates a number of metrics that are commonly used and reported throughout the banking industry on an underlying basis, as these provide the Board and the Executive with a consistent view of these measures from period to period and provide relevant information to investors and other external stakeholders. Descriptions of alternative performance measures used throughout this Report, including their basis of calculation, are set out below. Banking Net Interest Margin (NIM) Net interest income, calculated on an underlying basis, as a percentage of simple average interest-earning banking assets. Cost of funds (spread) Funding costs divided by average funding balances less the average 3 month Libor interest rate for the period. Cost of risk Impairment charges, net of debt recoveries, divided by simple average gross loans for the period. Cost:income ratio Operating expenses divided by total income, calculated on an underlying basis. JAWS The difference between the period on period percentage change in total income less the period on period change in operating expenses calculated on an underlying basis. Loan-to-deposit ratio The ratio of loans and advances to customers, net of allowances for impairment, divided by customer deposits (each excluding adjustments for fair value of portfolio hedging). Net interest margin (NIM) Net interest income, calculated on an underlying basis, as a percentage of simple average interest-earning assets. Return on assets Profit attributable to equity owners divided by closing total assets. Return on tangible equity (RoTE) Underlying profit before tax (adjusted to deduct distributions to Additional Tier 1 securities) less tax calculated using the statutory effective tax rate of the Group, divided by simple average tangible equity. Tangible equity is calculated as total equity less other equity instruments and intangible assets. Tangible net asset value per share Net assets excluding intangible assets and Additional Tier 1 securities divided by the closing number of Ordinary Shares (excluding own shares held). Underlying basic earnings per Underlying profit before tax (adjusted to deduct distributions to Additional Tier 1 securities) less tax share calculated using the statutory effective tax rate of the Group, divided by the weighted-average number of Ordinary Shares outstanding during the period (excluding own shares held). Underlying net interest income Statutory net interest income adjusted for a subset of certain items as detailed on page 48. Underlying profit/(loss) before tax Statutory profit/(loss) before tax adjusted for certain items as detailed on page 48. Underlying return on assets Underlying profit before tax (adjusted to deduct distributions to Additional Tier 1 securities) less tax calculated using the statutory effective tax rate of the Group, divided by a simple average total assets. Underlying total income Statutory total income adjusted for a subset of certain items as detailed on page 48.
The Group also discloses a number of capital and liquidity metrics relevant to its financial position for which calculation is required under prudential rules issued by the PRA and FCA, in line with requirements of UK/EU legislation and Basel III. The bases of calculation of those metrics is defined within the relevant legislation (for example CRD IV) and are disclosed in the Glossary. Virgin Money Group Annual Report 2017 I 263
Glossary Strategic Report
Advanced Internal Ratings Based A CRD IV approach for measuring exposure to credit risks. The method of calculating credit risk capital (AIRB) Approach requirements uses internal probability of default (PD), loss given default (LGD) and exposure at default (EAD) models. AIRB approaches may only be used with Prudential Regulation Authority (PRA) permission. Basel III Global regulatory standard on Bank Capital Adequacy, Stress Testing and Market and Liquidity proposed by the Basel Committee on Banking Supervision in 2010. See also CRD IV. Basis Point (bps) One hundredth of a per cent (0.01%). 100 basis points is 1%. Used when quoting movements in interest rates Financial Results or yields. Capital at Risk (CaR) Approach set out for the quantification of interest rate risk expressed as the impact to the present value of the Group’s capital under interest rate sensitivity analysis. CASS Client Assets Sourcebook, included in the FCA Handbook and sets out the requirements with which firms must comply when holding or controlling client assets. Certificates of Deposit A certificate issued by a bank to a person depositing money for a specified length of time at a specified rate of interest. Charge-Off Charge-off occurs on outstanding credit card balances where in-house collections and recoveries have been exhausted. This involves the removal of the balance and associated provision from the balance sheet with any remaining outstanding balance recognised as a loss. Charged-off accounts may be subject to debt-sale, where by additional recoveries will be taken to profit or loss. Common Equity Tier 1 Capital The highest quality form of capital under CRD IV that comprises common shares issued and related share Governance (CET1) premium, retained earnings and other reserves excluding the cash flow hedging reserve, less specified regulatory adjustments. CRD IV In June 2013, the European Commission published legislation for a Capital Requirements Directive (CRD) and Capital Requirements Regulation (CRR) which form the CRD IV package. The package implements the Basel III proposals in addition to the inclusion of new proposals on sanctions for non-compliance with prudential rules, corporate governance and remuneration. The rules are implemented in the UK via the PRA policy statement PS7/13 and came into force from 1 January 2014, with certain sections subject to transitional phase in. Credit Enhancements Risk reduction techniques that improve the credit standing of financial obligations; generally those issued by
a structured entity in a securitisation. Risk Management Report Credit Valuation Adjustments These are adjustments to the fair values of derivative assets to reflect the creditworthiness of the (CVA) counterparty. Cross-Currency Swaps An arrangement in which two parties exchange specific principal amounts in different currencies at inception and subsequent interest payments on the principal amounts. Debt Securities Debt securities are assets held by the Group representing certificates of indebtedness of credit institutions, public bodies or other undertakings, excluding those issued by Central Banks. Earnings at Risk (EaR) Approach set out for the quantification of interest rate risk expressed as the impact to forecast net interest income under interest rate sensitivity analysis. Expected Loss (regulatory) Regulatory expected loss represents the anticipated loss, in the event of a default, on a credit risk exposure modelled under the Advanced Internal Ratings Based approach. Expected loss is determined by multiplying the associated PD, LGD and EAD.
Expected Credit Loss (IFRS 9) Expected Credit Losses are a provision held on the balance sheet for all financial instruments. Expected Financial Statements Credit Losses may be recognised on either a 12 month or lifetime basis. The level will be determined by the performance of individual assets, and take into consideration associated credit risk attributes, including a significant increase in credit risk or any credit impairment. An expected credit loss may either be individual or collective as a result of the raising of a charge against profit for the expected loss inherent in the lending book. An expected credit loss may either be individual or collective. Exposure at Default (EAD) An estimate of the amount expected to be owed by a customer at the time of a customer’s default. Forbearance Forbearance takes place when a concession is made on the contractual terms of a loan in response to borrowers’ financial difficulties; or for where the contractual terms have been cancelled for credit cards. Forbearance options are determined by assessing the customer’s personal circumstances. Full Time Equivalent (FTE) A full time employee is one that works a standard five day week. The hours worked by part time employees are measured against this standard and accumulated along with the number of full time employees and
counted as full time equivalents. Other Information Funding for Lending Scheme (FLS) The Bank of England launched the Funding for Lending scheme in 2012 to allow banks and building societies to borrow from the Bank of England at cheaper than market rates for up to four years. This was designed to increase lending to households and businesses by lowering interest rates and increasing access to credit. Funding Risk The inability to raise and maintain sufficient funding in quality and quantity to support the delivery of the business plan. 264 I Virgin Money Group Annual Report 2017
Glossary
Impaired Assets Loans that are in arrears and where the carrying amount of the loan exceeds the expected recoverable amount. All mortgage expired terms, fraud and operational risk loans are categorised as impaired irrespective of the expected recoverable amount. Unsecured lending assets are treated as impaired at one day past due. Impairment Allowance (IAS 39) Impairment allowances are a provision held on the balance sheet as a result of the raising of a charge against profit for the incurred loss inherent in the lending book. An impairment allowance may either be individual or collective. Impairment Losses An impairment loss is the reduction in value that arises following an impairment review of an asset that determined that the asset’s value is lower than its carrying value. Interest Rate Risk The risk of a reduction in the present value of the current balance sheet or earnings as a result of adverse movement in interest rates. Interest Rate Risk in the Banking The risk of a reduction in the present value of the current balance sheet or earnings as a result of an adverse Book (IRRBB) movement in interest rates arising as a consequence of carrying out and supporting core business activities. Internal Capital Adequacy The part of the Pillar 2 assessment to be undertaken by a bank. The ICAAP allows financial institutions to Assessment Process (ICAAP) assess the level of capital that adequately supports all relevant current and future risks in their business. In undertaking an ICAAP, a financial institution should be able to ensure that it has appropriate processes in place to ensure compliance with CRD IV. Internal Liquidity Adequacy The ILAAP provides comprehensive documentation of the Bank’s Liquidity Risk Management framework, Assessment Process (ILAAP) including: identifying the key liquidity and funding risks to which Virgin Money is exposed; describing how these risks are identified, monitored and measured and describing the techniques and resources used to manage and mitigate these risks. Leverage Ratio Total Tier 1 Capital expressed as a percentage of Total assets (adjusted in accordance with CRD IV). Liquidity Coverage Ratio (LCR) Stock of high quality liquid assets as a percentage of expected net cash outflows over the following 30 days according to CRD IV requirements. Liquidity Risk The inability to accommodate liability maturities and withdrawals, fund asset growth, and otherwise meet the Group’s contractual obligations to make payments as they fall due. Loan-to-Value Ratio The amount of a secured loan as a percentage of the appraised value of the security, e.g. the outstanding amount of mortgage loan as a percentage of the property’s value. Loss Emergence Period (IAS 39) Under IAS 39, the loss emergence period allows for the recognition of impairment in respect of losses that have been incurred but not reported. The emergence period is measured as time between the emergence of impairment triggers and the time at which the loss is incurred. Loss Given Default (LGD) The estimated loss that will arise if a customer defaults. LGD comprises the actual loss (the part that is not expected to be recovered), after taking account of credit risk mitigation, for example, any security held over collateral and the economic costs associated with the recovery process. Master Netting Agreement An agreement between two counterparties that have multiple derivative contracts with each other that provides for the net settlement of all contracts through a single payment, in a single currency, in the event of default on, or termination of, any one contract. Mortgage Completion Spread The balance weighted average effective interest rate on new mortgages advanced in the period less the cost of associated fixed to 3 month Libor interest rate swaps. Net Interest Income The difference between interest received on assets and interest paid on liabilities. Net Promoter Score (NPS) A measure of satisfaction that ranges between -100 and +100 and represents the likelihood of respondents recommending Virgin Money, its products or services to others. From a scale between 0 to 10, those scoring 9 to 10 are categorised as Promoters, those scoring 0 to 6 as Detractors and those scoring 7 to 8 as Passives. The NPS is calculated by subtracting the percentage of respondents who are Detractors from the percentage of respondents that are Promoters. Passives count towards the total number of respondents and thus decrease the percentage of Detractors and Promoters. Net Stable Funding Ratio (NSFR) The ratio of available stable funding to required stable funding over a one year time horizon, assuming a stressed scenario. The ratio is required to be 100% with effect from 2018. Available stable funding would include such items as equity capital, preferred stock with a maturity of over one year, or liabilities with a maturity of over one year. Percentage Point (pp) Unit for measuring the difference of two percentages. A change from 1% to 2% is 1 percentage point. Pillar 1 The part of CRD IV that sets out the process by which regulatory capital requirements should be calculated for credit, market and operational risk. Pillar 2 The part of CRD IV that ensures financial institutions hold adequate capital to support the relevant risks in their business. It also encourages financial institutions to develop and use enhanced risk management techniques in monitoring and managing their risks. Virgin Money Group Annual Report 2017 I 265 Strategic Report
Pillar 3 The part of CRD IV that sets out the information banks must disclose in relation to their risks, the amount of capital required to absorb them, and their approach to risk management. The aim is to strengthen market discipline. Probability of Default (PD) The probability of a customer defaulting over a defined outcome period. Default occurs where a borrower has missed six months of mortgage repayments or three months of credit card repayments, or the borrower is deemed to be unlikely to repay their loan. The outcome period varies for assessment of capital requirements
and for assessment of provisions. Financial Results Repurchase Agreements (Repos) A form of short-term funding where one party sells a financial asset to another party with an agreement to repurchase at a specific price and date. From the seller’s perspective such agreements are repurchase agreements (repos) and from the buyer’s reverse repurchase agreements (reverse repos). Risk Appetite The risk appetite sets limits on the amount and type of risk that the Group is willing to tolerate in order to meet its strategic objectives. Risk-Weighted Assets A measure of a bank’s assets adjusted for their associated risks. Risk weightings are established in accordance with PRA rules and are used to assess capital requirements and adequacy under Pillar 1. Securitisation Securitisation is a process by which a group of assets, usually loans, are aggregated into a pool, which is used to back the issuance of new securities through an SPV. Sovereign Exposures Exposures to central governments and central government departments, central banks and entities owned or guaranteed by the aforementioned. Governance Standardised Approach In relation to credit risk, a method for calculating credit risk capital requirements using External Credit Assessment Institutions (ECAI) ratings of obligors (where available) and supervisory risk weights. In relation to operational risk, a method of calculating the operational risk capital requirement by the application of a supervisory defined percentage charge to the gross income of specified business lines. Stress Testing Techniques where plausible events are considered as vulnerabilities to ascertain how this will impact the capital or liquidity resources which are required to be held. Tier 1 Capital A measure of banks financial strength defined by the PRA. It captures Common Equity Tier 1 capital plus other Tier 1 securities in issue, but is subject to deductions including in respect of material holdings in financial companies.
Tier 1 Capital Ratio Tier 1 capital as a percentage of risk-weighted assets. Risk Management Report Tier 2 Capital A further component of regulatory capital defined by the PRA for the Group. It comprises eligible collective assessed impairment allowances under CRD IV. Term Funding Scheme (TFS) The Bank of England launched the Term Funding Scheme in 2016 to allow banks and building societies to borrow from the Bank of England at rates close to Bank Base Rate. Virgin Virgin Group Holdings Limited. Virgin Money Trademark Licence The agreement under which Virgin Enterprises Limited (a subsidiary undertaking of Virgin Group Holdings Agreement Limited) grants perpetual licence to Virgin Money to use the ‘Virgin’ and ‘Virgin Money’ trademarks.
Financial Statements Other Information 266 I Virgin Money Group Annual Report 2017
Abbreviations
AGM Annual General Meeting GDPR General Data Protection Regulation MREL Minimum Requirements for Own Funds and Eligible Liabilities AIRB Advanced Internal Ratings Based GHG Greenhouse Gas NIM Net Interest Margin AT1 Additional Tier 1 HMRC Her Majesty’s Revenue & Customs NPS Net Promoter Score BOE Bank of England HPI House Pricing Index NSFR Net Stable Funding Ratio CET1 Common Equity Tier 1 Capital HQLA High Quality Liquid Assets PCA Personal Current Account CRD Capital Requirements Directive IAS International Accounting Standards PD Probability of Default CRR Capital Requirements Regulation IASB International Accounting Standards Board PRA Prudential Regulation Authority CVA Credit Valuation Adjustment ICAAP Internal Capital Adequacy PSD2 Second Payment Services Directive Assessment Process DTR Disclosure Guidance and IFRS International Financial Reporting Standards PwC PricewaterhouseCoopers LLP Transparency Rules EBO Everyone better off ILAAP Individual Liquidity Adequacy RoTE Return on Tangible Equity Assessment Process EAD Exposure At Default IPO Initial Public Offering RMBS Residential Mortgage Backed Securities EIR Effective Interest Rate IRRBB Interest Rate Risk in the Banking Book RWAs Risk-weighted Assets EPS Earnings per share ISA Individual Savings Account SID Senior Independent Director FCA Financial Conduct Authority ISDA International Swaps and Derivatives SME Small or Medium-sized Enterprise Association FLS Funding for Lending Scheme LIBOR London Inter-Bank Offered Rate SPV Special Purpose Vehicle FRC Financial Reporting Council LCR Liquidity Coverage Ratio TFS Term Funding Scheme FSCS Financial Services Compensation LGD Loss Given Default TNAV Tangible Net Asset Value Scheme FTE Full Time Equivalent LTIP Long-Term Incentive Plan TSYS Total System Services, Inc FTP Funds Transfer Pricing LTV Loan-to-Value Virgin Money Group Annual Report 2017 I 267
Shareholder Information Strategic Report
Annual General Meeting (AGM) The AGM will be held on 9 May 2018 at the offices of Allen & Overy at One Bishops Square, London, E1 6AD. Further details about the meeting, including the proposed resolutions, can be found in our Notice of AGM which will be issued to shareholders and available on our website in due course.
Shareholder concentration Financial Results Number of shares – As of 31 December 2017 millions Shareholdings % Individuals 0.4 451 0.1 Banks & Nominees 251.5 409 56.5 Other companies 178.2 94 40.1 Other corporates 14.8 38 3.3 444.9 992 100.0 Governance Number of shares – Range of shareholdings: millions Shareholdings % 1-1,000 0.2 474 0.0 1,001-10,000 0.7 179 0.2 10,001-100,000 5.1 134 1.1 100,001-1,000,000 49.7 139 11.2 1,000,001-10,000,000 163.0 60 36.7 Risk Management Report >10,000,001 226.2 6 50.8 444.9 992 100.0 Financial Statements Other Information 268 I Virgin Money Group Annual Report 2017
Shareholder Information
Registrar The Group’s share register is maintained by Equiniti Limited. Equiniti is responsible for keeping the Group’s register of members up to date and for administering the payment of dividends.
Enquiries Please contact Equiniti if you have any enquiries about your shareholding, including the following: > Change of name or address. > Change of bank account details. > Loss of share certificate, dividend warrant or tax voucher. > To obtain a form for dividends to be paid directly to your bank or building society account (tax vouchers will be sent to your registered address unless you request otherwise). > Request for copies of the report and accounts in alternative formats for shareholders with disabilities. > Lost or out of date dividend payments. > Share transfers. > Information regarding the administration of your shareholding. UK – 0371 384 2937 Textphone – 0371 384 2255 Overseas – +44 (0)121 415 0857 Lines are open 8.30am to 5.30pm Monday to Friday (except UK public holidays). Equiniti operates a web-based enquiry and portfolio management service for shareholders www.shareview.co.uk Address: Equiniti Limited, Aspect House, Spencer Road, Lancing, West Sussex, BN99 6DA.
Issued by Virgin Money Holdings (UK) plc. Registered office: Jubilee House, Gosforth, Newcastle upon Tyne NE3 4PL Registered in England and Wales no.03087587